MARKET PULSE: 30 May – 01 June 2012
I will be away from 2nd June for couple of weeks but will stay in touch with short updates and trading ideas through my blog and twitter@mosesharding........
Currency market
USD/INR extension below the set weekly range of 55.25-55.95 (low of 55.01) could not sustain for strong reversal into the higher end (high of 55.88) before close of day at 55.68; daily close above 55.65 is bearish for rupee. We had considered 55.25-54.80 good to cover short term payables and in any case advised not to stay “short” dollars there. This view is based on expectation of reversal into 55.95-56.40 (driven by USD Index rally into 82.60) where it is good to sell 3M/August dollars and in any case considered not to stay “long” dollars there (from where we saw sharp correction into 55.01). What next? There is tremendous bearish set up on rupee; petrol price hike did provide bit of relief but inability to roll-out price hike in diesel, kerosene and LPG highlighted the weak political structure to address serious concerns on reforms and cost subsidisation. The expectation for FY13 is bearish with risk of slippage in GDP growth and fiscal deficit to around 6% of GDP. There is no need to review the set weekly range and continue to watch overshoot beyond 55.25-55.95 (into 54.80 or 56.40) not sustainable. Let us stick to the strategy of selling August 2012 dollars on spot move into 55.95/56.35 based on hope (and confidence) that RBI would go all out to prevent rupee posting a new all-time low above 56.39; if it does, we may not only see test of 57 (higher end of set short term range of 52-57) but also extension of weakness into 58.25-58.50 ahead of 59.75-60.00 in due course. The combination of weak fundamentals and strong USD (against global currencies) will be deadly against rupee and needless to say, rally of USD against rupee will be much faster than against other EM currencies. Rupee is already undervalued and RBI should prevent further devaluation in the rupee; highly devalued rupee on the back of high inflation, high interest rates and tight liquidity will be very bearish on the Indian economy and it would seriously hurt growth prospects. The “baby steps” approach (post strong measures on 15th December 2011) has not yielded results and relaxation in rules on investments into debt capital market for FIIs and/or welcoming new set of foreign investors may not help. It will help when the going is good but not at this stage when there is not a single factor in support of rupee. The low forward premium (3M at 7% and 12M at 5%) will not be considered good to “receive” if expectation is bearish; thus shifting the forward market also into dollar demand-driven mode. RBI has no option but to go “big bang” to provide sharp reversal. For now, let us watch 55.35-56.10 with overshoot limited to 55.10-56.35. It is also critical that USD Index stays below strong resistance at 82.60-82.70 to prevent preparation of momentum for rupee move into new all time low. Fleet footed traders can look to sell at 56.10-56.35 (with stop above 56.40) for 55.35-55.10.
EUR/USD held at the higher end of set weekly range of 1.2250-1.2625 but reversal from high of 1.2624 found solid support above 1.2500 but could not hold to post a low of 1.2461. While we maintain the near/short term outlook for extended Euro weakness into 1.22-1.18, we may need to allow for bit of consolidation at 1.24-1.27 before move into 1.2250-1.2200. EUR/USD will face strong selling pressure around 1.2565/1.2620/1.2660/1.2690 before down into 1.22. The strategy is to stay “short” looking for sharp turnaround from one of these selling points for the said target and to get into new trading range of 1.22-1.25.
No change in view in USD/JPY and EUR/JPY (REFER TO WEEKLY REPORT)
Interest rate market
10Y Bond yield stayed in consolidation mode at 8.50-8.53% with test/break either-way could not sustain. However, weak rupee (and resultant dollar sales by RBI) will provide strong support to Bond market for gradual gains into lower end of set weekly range of 8.45-8.55%. Hold on to “long” entry at 8.53%; add at 8.54-8.56% if seen for 8.47-8.45%.
OIS rates eased into the lower end of set weekly range of 7.95-8.05% (1Y) and 7.45-7.55% (5Y) tracking easy call money market (ahead of reporting Friday) and downtrend in bond yields. The spread between 10Y Bond yield and 5Y OIS rate is steady around 105 bps (midpoint of 100-110 bps range). Let us continue to watch these range as move below the lower end will be short-lived for strong bounce back on shift into new reporting fortnight and ahead of advance tax outflows.
12M FX premium completed the move from 4.90% to 5.60% and reversed sharply to 5% on combination of profit booking, higher spot USD/INR and aggressive dollar sales by RBI. In the meanwhile 3M premium was steady around 7%. The focus is now back to 4.90-5.40% in 12M while 3M premium stays in consolidation mode at 6.75-7.0%. The strategy is to stay paid in 12M at 4.90-4.80% (with stop below 4.75%) for 5.40-5.65%.
Equity market
NIFTY took out strong resistance at 5000 (high of 5020) before close at 4990. It is great comfort to bulls that not only correction from above 5000 is shallow (low at 4982) but the rupee impact is not felt. Let us continue with the set weekly range of 4800-5100 and look for gradual move into upper end (into set sell zone of 5075-5125) before sharply down to 4800 (into buy zone of 4825-4775).
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