MARKET PULSE: Weekly report for 05-09 March 2012
Currency Market
USD/INR got solid support at short/medium term support zone of 48.85-48.60 (low of 48.82) for swift reversal into strong resistance zone at 49.30-49.55 (high of 49.57) before close of week at 49.50. Our strategy was to sell April 2012 dollars above 50 on spot rally into 49.25-49.30 (high of 50.24); to sell July 2012 dollars above 51 on extended rally into 49.45-49.50 (high of 51.06) and to cover 15-30 days imports at below 49 on rupee gains into 48.85-48.60 (low for 15 days at 48.98). The plan was to play end-to-end of spot moves within 48.85-49.50. Rupee rally from 49.76 (since 10th February) had premature end at 48.82 without getting into the final pit stop at 48.60. The trigger for the sudden dollar strength was from (a) more than expected demand for funds in ECB’s LTRO auction counter; (b) no signal of QE3 from the FED and (c) fear of RBI’s dollar purchases in the spot market to release pressure on severe rupee liquidity squeeze in the system. What next? The medium/long term worries over Euro zone is back into focus while near term concerns are not deep given the extent of financial support from ECB and strong political intent from Germany/France to avert near term disaster. At this stage, there are lot of gaps and issues to be addressed to look for medium term recovery in the Euro zone to avoid getting into growth and recessionary issues. So, external cues have turned neutral at this stage with US dollar expected to gain strength over major currencies in the near term. The expectation into the medium is for uptrend in US interest rates (from zero to 1) and downtrend in Euro zone rates (from 1 to zero); thus shifting the investor appetite from the Euro zone to the US. USD Index has been solid at strong support zone of 78.20-78.00 (low of 78.10) and reversal from there is now held at 79.35-79.50 resistance zone (high of 79.45). On the domestic front, fundamentals continue to stay weak driven by compression in growth momentum; high fiscal deficit; issues related to high crude oil price etc. The only positive factor for rupee at this stage is the robust off-shore flows into debt and equity capital market and dollar supply driven mode (both in cash and forward market) attracted by high domestic interest rates. So in the event of aggressive liquidity support from RBI and shift into rate cut cycle, interest rate play advantage will stay diluted to reduce dollar supplies. It is possible that USD/INR has already shifted into a new near term range of 49.00-50.00 from the earlier 48.50-49.50 range. The strategy to absorb 1X12M (March 2012 over February 2013) premium at 6.10-6.25% was to protect the premium while waiting for higher spot value any time before end of March 2012. For the week, let us watch 49.15-49.75 with initial bias into higher end. It is important that USD Index stays below strong resistance at 79.50 while extended rally into 80.15-80.50 would trigger extended USD/INR rally into 49.90-50.00 (bringing the focus into 50.50). At this stage, let us prefer 49.75-50.00 to stay safe. Strategic players can look to buy in two lots at 49.30-49.25 and 49.10-49.05 and sell in two lots at 49.70-49.75 and 49.90-49.95 with affordable stop. Exporters who are already covered on most of their future receivables (up to 6-12M tenor) at attractive rates need not panic on this move. It is unfortunate that exporters did not have the option to exit export contracts on this run into 48.85-48.60 on RBI’s restrictions on booking and cancellations of forward contracts. On the other hand, importers are also mostly covered on short term payables (up to 1-2M) on recent dollar gains into 48.60 (at forward value below 49); there is no need to panic on this run as short term outlook for rupee is not in favour of extended weakness beyond 50 and it is not considered good to pay high premium to acquire forward dollars beyond 1M tenor.
The uptrend in FX premium lost momentum at set “receive” level of 9% (3M); 6.5% (12M) and 6.15% (1X12M) for close of week at 8.4%; 6.1% and 5.85% respectively. The exchange rate play will now exert downward pressure while interest rate play has turned neutral despite tight liquidity and high cost of liquidity. The expectation build-up of monetary action to restore normalcy in the money market will limit upside pressures on premium. Now, the focus shifts into the near term support set at 8% in 3M and 5.75% in 12M. For the week, let us watch 3M at 8.0-8.75% and 12M at 5.75-6.25% with bias into lower end. The strategy is to receive 3M at 8.75-9.0% and 12M at 6.20-6.35% for near term objective at 7.5% (3M) and 5.5% (12M). Thereafter, would look for stability in 3M at 7.0-7.5% and 5.0-5.5% in 12M. Hold 1X12M (Mar/Feb) received at 6.15% (current 5.85%); add at 6.0% for 5.65-5.50%.
USD/JPY has now completed end-to-end move between set buy zone at 80.25-79.75 (low of 79.99) and sell zone at 81.50-82.00 (high of 81.86) within the set immediate term range of 80-82. What next? USD/JPY pair is in strong bullish uptrend for near term objective above 85 to get into a short term range play at 80-85 (up from previous 75-80). The next pit stop is around 82.50; break of which will trigger quick extension into 85. For this move, 81.00-80.75 is expected to hold. For the week, let us watch 80.75-82.50 and bias is for test/break of higher end into 84.50-85.50. The strategy is to buy dips into 81.25-80.75 with stop below 80.50. Let us also buy on break of 82.75 for near term objective at 85.00-85.50. For those who shifted USD liability to JPY (at 76.50-75.50) can look to book profit there (shifting the liability back to USD) or hold with trail stop loss on conclusive break of 80. EUR/JPY is in consolidation mode at 107-110 but maintains near term uptrend into 111.50. However, the immediate term bias is for test/break of lower end into 105.50-105.75 before sharp reversal. Let us stay aside and await break out of the 107-110 range and thereafter look to buy at 106.25-105.75 (with stop below 105.50) and/or sell at 111.00-111.50 (with stop above 111.75).
“Buy the rumour, sell the fact” syndrome drove EUR/USD down from pre LTRO high of 1.3479 for sharp reversal below 1.3200 (low of 1.3185). In the process, it triggered sell entry at 1.3450-1.3525 and buy entry at 1.3300-1.3225. The higher than expected demand for funds at ECB’s LTRO counter hit investors’ sentiment on economic revival in the Euro zone. It is possible that financial system in the Euro zone is getting into debt trap while proposed fiscal austerity will impact growth momentum. There is no optimism at this stage either on economic recovery or financial stability in the Euro zone. On the other hand, US economy is slowly and steadily getting out of its woes. The investor appetite is now on “risk-off” mode for the Euro zone and into “risk-on” mode for the US zone. Having said this, liquidity over-hang in the Euro zone will provide kind of stability in EUR/USD at 1.29-1.34 in the immediate term. For the week, let us watch consolidation at 1.3125-1.3400 not ruling out extended weakness into 1.2975 before bounce back to 1.3475-1.3500. Over all, we look for near term consolidation at 1.30-1.35. The strategy for fleet footed traders is to sell at 1.3375-1.3425 (with stop above 1.3450) and buy at 1.3150-1.3100 (with stop below 1.3075). Strategic players can stay away for break-out direction and thereafter, look to buy 1.3000-1.2950 and sell at 1.3475-1.3525 with tight affordable stop.
Money Market (Bond/OIS):
The higher demand for funds in the first week of reporting fortnight cycle pushed LAF draw-down to record high of over Rs.1.9 Trillion (almost 3% of NDTL) against RBI’s comfort level of Rs.0.60 Trillion (1% of NDTL). As expected, money market rates shot through the roof to over 11% in shorter tenor of 1-3M; thus building an inversion in the rate curve with 6-12M being traded at 10.60-10.75%. The shift into second week of the reporting cycle should ease pressure on liquidity squeeze with LAF draw down trending lower to Rs.1.5-1.25 Trillion by end of week. The worst is not yet behind as we approach second fortnight of the month when advance tax outflows will hit the system. It is good that tax outflows (expected to be at Rs.50-60K Crores) will hit the system by end of first week of next reporting cycle to limit damage. Nevertheless, higher demand for funds from Banks ahead of financial year end will keep term money rates at elevated levels. The expectation of aggressive liquidity support from RBI (in the form of 50-100 bps CRR cut and/or other measures discussed in earlier reports) and shift into rate cut mode (before April 2012 annual policy) is providing stability in 1Y Bond yield around 8.5% and consolidation in 1Y OIS rate at 8.10-8.20%. It was considered good to stay invested in 1Y Bond at 8.50-8.65% (high of 8.55%) and received in 1Y OIS at 8.20-8.25% (high of 8.24%). This strategy remains valid into the near term (till end of March 2012) on expectation of downtrend in rates/yields on shift into FY13 with near term targets at 8.15% (1Y Bond) and 7.90% (1Y OIS). For the week let us watch overnight rate at 8.75-9.0%; 1Y bond yield at 8.35-8.50% and 1Y OIS at 8.05-8.15%. The draw down from LAF counter is expected to be low at Rs.1.50-1.25 Trillion. Strategy for the week is to stay invested in 1Y bond at 8.40-8.50% and hold 1Y OIS received entered at 8.23%; add at 8.17-8.19% if seen with stop above 8.20% and t/p at 8.05-8.0%. The system is in immediate need of liquidity to the tune of Rs.1 Trillion. The priority has now shifted from liquidity to cost of liquidity, bringing the need to cut rates soon or drive the policy rate to Reverse Repo rate (currently at 7.5%) through one-shot aggressive infusion of liquidity. It is possible that some thing comes up from RBI effective 10th March as we move into a very tough reporting fortnight cycle starting 10th March with huge demand for funds from Banks and flow of advance tax monies into RBI during the end of the first week of the fortnight; any monetary action on 15th March would be effective from 24th March (start of the next reporting cycle), by then the damage would have been severe.
10Y bond yield could not extend its gains below 8.20%; unexpected OMO announcement could only guide a brief rally into 8.18% before gradual reversal back into 8.25% for close of week at 8.22%. In the meanwhile 5Y OIS rate was in tight consolidation mode at 7.40-7.45% (high of 7.45%) before close of week at 7.41%. Our strategy was to stay invested in 10Y Bond at 8.23-8.26% and received in 5Y OIS at 7.43-7.48% on expectation of delivery of monetary actions from RBI ahead of midterm review. RBI will watch demand on the Repo counter in the second week of reporting cycle and money market rates. If LAF draw down stay at elevated levels of Rs.1.25-1.50 Trillion and short term rates above 11%; it will be fair to expect 100 bps CRR cut and 50 bps rate cut effective 10th March 2012. Let us see how things unfold. It is time to shift monetary stance to support growth given the significant dilution in inflation worries from weak rupee and high commodity prices. USD/INR below 50 and NYMEX crude below 110 will provide comfort to RBI to shift priority from inflation to growth. For the week, let us watch 10Y at 8.10-8.25% and 5Y OIS at 7.30-7.45% with bias into lower end while test/break of higher end will set up good near term opportunity. The trading strategy is to hold 10Y long book entered at 8.23-8.25%; add at 8.25-8.28 if seen for immediate objective at 8.10%. Let us also hold 5Y received book entered at 7.43-7.45%; add at 7.45-7.47% if seen for immediate objective at 7.25%. Let us not chase gains beyond there (both in Bonds and OIS) at this stage and await more cues for the next move. Over all, we stay tuned to short term ranges of 8.0-8.35% (10Y bond) and 7.20-7.55% (5Y OIS) with test/break either-way not expected to sustain; hence the strategy to unwind long bonds at 8.10-8.0% for shift into 1Y at 8.40-8.50% (you may choose to front-run 1Y bond for this move).
Commodity market
It was a nice two-way trade within the set near term range of 1700-1800; end-to-end between the set buy zone of 1710-1690 (low of 1688) and sell zone of 1790-1810 (high of 1790). The expectation was for test/break of 1802 into 1835 and further into 1920 but reversal from 1790 was sharp post ECB’s LTRO auction with no signs of QE3 from the FED. The focus now shifts to the downside into 1660-1650 while 1750-1760 arrests any spike. For the week, let us watch consolidation at 1650-1760 with bias into the lower end. Strategic investors can look to initiate “short” positions in two lots at 1735-1740 and 1755-1760 with stop at 1770 and t/p at 1660-1650; break of which will trigger a swift 100-150 dollar fall while chances of bullish reversal above 1802 is low at this stage.
The reversal in NYMEX crude from 110 found support below 105 for two-way consolidation at 105-108. Let us continue to watch sideways trading mode at 100-110 with extension limited to 95-115. The trade strategy is to stay short at 108-110 with tight stop for 101-100. If stopped sell again at 114-116 (with stop above 117) for 97-95. Over all, any extended rally above 110 into 115 is not expected to sustain.
Equity market
The reversal in NIFTY from the sell zone of 5550-5625 (high of 5630) into lower end of near term range of 5250-5550 (low of 5268) was sharp before close of week at 5359; inability to close the week above 5385-5400 is bearish into the new week. There has been confirmation of continued FII interest in Indian stocks post the aggressive liquidity injection in the Euro zone. The domestic investor appetite (from DIIs) will improve post return of normalcy in the Money market guided by RBI’s monetary actions. The domestic fundamentals continue to remain very weak from severe compression in growth momentum leading to higher fiscal deficit and low investor confidence. The other structural issue for the Indian economy is from widening trade gap resulting in import of capital from India to abroad. There is need to cut imports and boost exports. FY13 Budget will be watched for solutions to woes relating to fiscal deficit and trade deficit. On the monetary side, it is more or less certain that RBI shifts into growth supportive stance soon, thus preventing run-away weakness in domestic equity market. Over all, the momentum is now neutral to mildly bullish on run into 16th March FY13 budget. The first signal for bullish reversal could be from trigger of monetary actions by RBI ahead of 15th March midterm review. Let us see how things unfold. For the week let us watch consolidation at 5250-5550 with test/break either-way to attract. Strategic investors can stay prepared to buy in three lots; one each at 5300-5275; 5200-5175 and 5100-5075 (with stop below 5000) for sharp reversal back into 5600-5650. Fleet footed traders can look to buy at 5315-5265 with tight stop below 5250 for 5525-5550. Having seen and heard the worst, the way forward is expected to be better with pressure on the Government and RBI to deliver growth supportive measures.
Have a great week ahead...............Moses Harding
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