MARKET PULSE: Report for 07 MARCH 2012
Currency market
The reversal of USD/INR from 48.82 (into high of 50.35) is sharp. The trigger is again from external cues driven by strong dollar (against major currencies) pushing USD Index from below 78.20 to above 79.50 and higher crude oil price with risk (and fear) of extended gains in NYMEX crude into 115. There was good momentum (to rupee fall) post election results bringing the political risk into play. While the move fits well into the script looking for short term range play within 48.50-50.50 and the guidance to cover imports at 48.85-48.60, the speed of reversal is a surprise; down by over 3% since 29th February in 4 trading days. We asked exporters to sell April 2012 dollars at 51 (or above) on spot weakness into 50.35-50.50 (see MARKET PULSE report of 6th March) but close above 50.35 at 50.37 is negative. What next? USD Index is looking strong for extended gains into 80.25-80.40. It is important for USD to lose momentum here to protect rupee from extended weakness beyond 50.50 (into 51.00). At this stage, we stay tuned to near term range of 49.50-50.50 within revised short term range of 49-51. Exporters who missed the earlier opportunity to sell 1-3M dollars above 51 have the chance to do so on spot rupee weakness into 50.50-51.00. Importers having covered 1-2M payables at below 49 (on recent spot move into 48.60) need not panic on this run. For now, let us watch support at 49.95-49.75 and resistance at 50.45-50.80. Strategic players who have locked in higher premium of Mar/Feb at 6.15% (280-285) can cover March 2012 dollars on spot gains above 50.50 (for February 2012 forward dollar rate above 53.50). For today, let us watch consolidation at 50.15-50.50 with overshoot limited to 50.00-50.65. Fleet footed traders can play the extended move with tight stop on break out from the outer ring. USD/INR is expected to lose its traction with USD Index (and EUR/USD) on extension into 50.65-51.00 on fear of RBI’s dollar supplies there.
FX premium eased nicely into the strong near term support zone of 8.0-8.15% (3M) and 5.75-5.85% (12M) from the recent peak of over 9% in 3M and 6.5% in 12M. In the process 1X12M completed end-to-end move from 6.15% to 5.65% providing exit at 5.65% on our received book entered at 6.15%. The strategy to receive 3M around 9% has also worked well. Over all, FX premium has traded to the script between the set near term range of 8.0-9.0% in 3M and 5.75-6.5% in 12M. What next? Let us now allow for bit of consolidation till midterm review of monetary policy is out of the way and watch 3M at 8.0-8.75% and 12M at 5.65-6.15% with test/break either-way to attract. We are yet to see the worst in money market and reversal in spot rupee from 50.50-51.00 to 49.50-49.00 will trigger the exchange rate play as well. For today, let us watch consolidation in 3M at 8.0-8.5% and 5.75-6.15% in 12M not ruling out test/break of higher end to set up yet another receiving opportunity into the near term. The trade strategy is to pay 12M at 5.80-5.65% and receive 12M at 6.10-6.25% with tight affordable stop. There is no change in outlook for shift into short term consolidation at 7-8% (3M) and 5.0-5.5% (12M) in Q1 of FY13.
USD/JPY lost steam above immediate resistance at 81.80 (high of 81.86) for a sharp correction into lower end of set near term range of 80.50-82.50 (low of 80.59). It is important to hold at 80.50-80.25 to retain its upward momentum into 82.50; else gradual move into 79.50 comes into play. Now, the near term focus shifts to consolidation at 80-82. The strategy is to play end-to-end of 80-82 range by buying at 80.25-79.75 (with stop below 79.50) and selling at 81.75-82.25 (with stop above 82.50). EUR/JPY sliced through immediate support of 107.00 into the set buy zone of 106.25-105.75 and held above set stop of 105.50 (low of 105.62). Ideally, it should hold here for reversal back above 108.25 into 109.75 triggered by sharp reversal in USD/JPY. If it does not, we may need to shift stance to neutral and watch fresh cues for immediate direction.
EUR/USD found support at the set buy zone of 1.3150-1.3100 (low of 1.3101) but looks weak. There is no decent correction from the strong support zone of 1.3120-1.3150. This sets up risk of extended weakness into 1.3000-1.2975 to the lower end of set weekly range of 1.30-1.35. For today, let us watch 1.3050-1.3250 allowing extension into 1.2975-1.3325. The immediate bias may be for a quick look at 1.3050-1.2975 before sharp reversal into 1.3250-1.3325. The trading strategy is to play this end-to-end move with tight stop on break thereof.
Fixed Income (Bond/OIS market)
The shift into second week of reporting cycle pushed LAF drawdown to below Rs.1 Trillion (and overnight rate into 8.75%) but money market rates continue to stay at elevated levels. All eyes on RBI’s monetary actions before end of the week on fear that demand on LAF counter will exceed Rs.2 Trillion during week beginning 12th March. The combination of higher demand in the first week and advance tax outflows will cause severe liquidity squeeze to trigger MSF counter (to send call money rate into double-digit). Let us see how things unfold. 10Y bond yield continued to stay in consolidation mode at 8.20-8.24% despite OMO; fear remains that liquidity support through CRR cut and without rate cut will be bearish for bond market to drive 10Y yield into 8.30-8.35%. RBI will have two options to maintain 10Y yield at 8.10-8.20% into FY13: either deliver 50 bps CRR cut and 50 bps rate cut or more than 100 bps CRR cut to drive operative policy rate from 8.5% to 7.5% by maintaining system liquidity in surplus mode by 1% of NDTL. Given this expectation, would continue to watch 10Y bond yield at 8.10-8.25% in the near term. For today, let us watch 10Y bond yield at 8.20-8.25%; not ruling out extended weakness over 8.25% that would set up a good investment opportunity for post policy objective at 8.10%. Hold on to “long” 10Y bond entered at 8.23-8.25% and add at 8.27-8.29% for 8.13-8.10%
OIS rates remained steady driven by mixed signals with 1Y rate boxed at 8.12-8.15% and 5Y at 7.37-7.40%. No change in view as we stay tuned to 8.0-8.15% in 1Y and 7.25-7.40% and test/break either-way to attract. Hold on to 1Y received entered at 8.23% (for 8.0%) and 5Y entered at 7.43-7.45%; add at 7.45-7.47% (for 7.25%).
Commodity market
NYMEX crude eased below the lower end of 105-108 range (low of 104.50) on the back of strong USD and watch near term range play at 100-110. Let us stay neutral at this stage and break either-way is good for minimum 10 dollar move. While it is a kind of toss up to choose the direction; slight bias is towards 95-97 deriving comfort that the West cannot allow global economic situation to turn worse because of higher crude oil. Despite reversal in most of commodity assets tracking strong dollar; NYMEX crude finding strong support above 105 is a serious concern. For now, let us watch consolidation at 103-108 with bias into 100; hence prefer to trade from “short” side. The trade strategy therefore is to sell at 108.5-109.5 (with stop above 110.5) for 103-100.
Gold is weak on the back of strong USD and has eased into immediate support at 1665 from 1715 and looks set for extension into 1625-1610 in the near term. It is possible that earlier 1700-1800 near term range is now shifted into 1600-1700 range. We need to be cautious seller on gains into 1685-1700 for this move. For now, let us watch 1635-1685 with bias for test/break of lower end.
Equity market
NIFTY traded end-to-end of set intraday range of 5210-5360 (see MARKET PULSE update on 6th March) for sharp gains from 5222 to over 5360 (high of 5382). This was followed by sharp reversal (triggered by serious setback for the Congress in election results) into 5206 before close of day at 5222. We had highlighted three critical levels in the near term; first one at 5300-5275 and the market has traded around this level between 5206-5382 and now is just above the next crucial level of 5200-5175. It is possible that this level gives way for extended weakness into the last pit stop at 5100-5075 considered good to trigger sharp reversal back into 5500-5600. No change in view at this stage. The next big events ahead are the monetary policy and the Union Budget. While there are no great expectations from the Budget, growth supportive monetary policy would provide good support to equity market bringing in domestic investors on shift into FY13. For now, let us watch 5100-5300 with immediate pressure into the lower end to be followed by sharp rally. Let us stay focussed on near term range play at 5100-5600 and would give up on conclusive break below 5075. It will be a good risk-reward trade for fleet footed traders to buy at 5125-5075 with stop below 5050.
Have a great day ahead............................Moses Harding
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