MARKET PULSE: 20 September 2012

MARKET PULSE: 20 September 2012

Currency market

Currency market is now into sideways consolidation mode after sharp rally since last week of July. Since then USD Index is down from 84.10 to 78.60; EUR/USD up from 1.2040 to 1.3169 and USD/INR down from 56.43 to 53.65. After this sharp reversal in USD driven by QE3 expectations, delivery of the same would obviously result in correction and consolidation. What next? Couple of questions are thrown up; where the correction process will end before USD getting into bearish trend? and/or, the bearish set up on the USD is over done? It is also obvious that very weak dollar and very strong Euro are not considered good when US and Euro zones are struggling to arrest recessionary trend. The immediate term range for the USD Index is seen to be at 78.60-79.90 (EUR/USD at 1.2850-1.3150 and USD/INR at 53.65-54.65).

The trend for Rupee is bullish given the positive cues both from domestic and external sectors. While the CAD issues continue to stay valid, flows into capital account will cover gap in Balance of Payment. The bullish sentiment will also trigger lead-lag play to keep forward market in supply driven mode. Taking all these together, correction process in USD/INR should lose steam ahead of either 54.70 or 55.05 as worst case scenario. For now, let us stay tuned to consolidation play within 53.65-54.65, test/break either-way not expected to sustain. The strategy is for exporters to sell 3M dollars around 54.50; 6M dollars around 54.75 and 12M dollars around 55.00. On the other hand, importers need to cover short term payables, say 1-2M on rupee gains into 53.65. Traders to stay tuned to twitter@mosesharding.com for views and trade recommendations.

EUR/USD met the correction target at 1.3025-1.3000 but the momentum is strong for further extension into 1.2925-1.2850 before getting into the bull trend. Having chased the move from 1.2150 to 1.3150, let us reinstate longs at 1.2950-1.2850. However, let us continue to stay with set short term range of 1.22-1.35; test/break either-way would attract strategic investors.

USD/JPY failed below 79 to retain the set short term range of 77-79. BOJ intervention fears continue to support USD/JPY which can risk one more touch of 80 before down. The strategy is to play end-to-end of this range.

Interest rate market

Midterm review of monetary policy is out of the way. The sensible and intelligent act of RBI has provided consolidation in rate market. The change in RBI’s stance is sighted; its concern on growth is visible now despite possible uptrend in headline inflation. However, way forward into the short/medium term is clear now. RBI will shift into growth supportive monetary stance soon. The timing of rate cut can be either in Q3 or Q4 of FY13, definitely not beyond. This expectation should provide relief to Bonds in the longer end causing temporary spread squeeze between 1-10Y Bond yields. Now, combination of positive expectations and supply side concerns will provide stability in 10Y Bond yield at 8.10-8.20%; while extended weakness into 8.20-8.25% is possible driven by pipe-line auctions, weak data on growth or downtrend in headline inflation can quickly push the 10Y Bond yield into 8%. It is time to stay invested on weakness into 8.18-8.23% (funded at 8% from RBI).

OIS rates are also into consolidation mode around 7.70% in 1Y and 7.20% in 5Y. The expectation of rate cut in Q3 or Q4 is already factored in. The immediate concern is on the extent of liquidity squeeze post advance tax outflows and higher demand for funds ahead of festive season. OIS rates will be under pressure in the near term tracking mild surge in call money rate and stability in bond yields. For now, let us watch 7.65-7.80% in 1Y and 7.10-7.25% in 5Y; test/break either-way is not expected to sustain. The strategy is to play end-to-end but good to stay received in the longer end (5Y at 7.22-7.27%) for 7.05-6.90%.

FX Premium has nicely traded end-to-end of 5.75-6% (12M) and 6.5-7% (3M). Let us continue to watch this range as test/break either-way will attract.

Equity market

NIFTY is also into consolidation mode after smart rally from 5032 to 5652 since last week of July. The correction process should ideally stay above 5505 driven by positive cues both from domestic and external sectors. In all probability NIFTY should regain the high of 6338 seen on last week of November 2010 by November 2012 or before end of FY13. The immediate hurdle is the 5630-5655 resistance zone which should be taken out for next objective at 5950-6000. For now, let us stay tuned to near/short term range of 5500-6000 with bias into higher end. The strategy is to buy on correction into 5530-5480 for next bout of 500-600 point rally.

Commodity market

NYMEX Crude reversed nicely from 100 to 90 to complete back-and-forth move between 90-100. Let us continue to watch this range and test/break either-way not expected to sustain.

The correction phase in Gold into 1735-1725 is very much valid (low so far at 1752) which should set up good buying opportunity for 1790-1805. For now, let us watch 1735-1790; test/break either-way not expected to sustain.

Moses Harding