MARKET PULSE: 17th SEPTEMBER 2012
It is nice to be back; previous report was in the first week of August and it feels good that most of the near term expectations (and objectives) are met:
· USD/INR lost steam at sell zone of 56.00-56.25 for sharp reversal into the set near term objective at 54.17
· EUR/USD rallied sharply from buy zone of 1.2150-1.2050 to meet the set objective at 1.30-1.32
· NIFTY rallied from buy zone of 5200-5175 to meet the set objective at 5600
· Gold rallied from buy zone of 1560-1585 to run past set objective at 1735
· NYMEX Crude rallied to meet the set objective at 100
· 10Y Bond yield traded end-to-end of set near term range of 8.10-8.25%, more than once
· 5Y OIS rate moved up from the pay zone of 7.0-6.90% to set objective at 7.25% while 1Y OIS rate traded end-to-end of 7.70-7.85%. The strategy to receive 1Y at 7.80-7.85% and pay 5Y at 7.0-6.90% has paid rich dividend.
MARKET PULSE, in its start of 2012 research report predicted delivery of QE3 in September 2012 and FED has now delivered more than expectation. It is an aggressive $40 Billion a month financial support; extension of “Operation TWIST” and affirmation of near zero interest rate policy till mid 2015. The loose monetary policy (low interest rates and aggressive liquidity support) of FED and ECB provides strong support to asset markets. The aggressive stance to restore economic growth and arrest growing unemployment provides comfort to shift from low risk/low yield assets to other high risk/high reward asset classes. The investment strategy of MARKET PULSE for 2012 is to maintain good leverage (borrow and invest) and it has turned out to be profitable so far.
What next?
Currency market
USD Index failed to hold on to gains above strong resistance at 82.60 (high of 82.72) and reversal from there has met strong support at 78.60. It is important for USD Index to hold above 78.10 (low of 2012) to prevent extended weakness into 74.75/72.70. The immediate (and near term) risk is for extended losses for the greenback against the Euro and Rupee. The Indian Government has taken bold steps to address fiscal consolidation and Balance of Payment. While it is too early to estimate quantum of off-shore dollar supplies into India (through debt and equity capital markets), there will be significant improvement in sentiment and confidence. Now, there will be pressure on RBI to get into growth supportive monetary stance. All these are good news for rupee bulls to extend rally beyond 54.17-53.99 into next objective at 53. USD/INR is now into near term range of 53-55 with bias into lower end. The rally in rupee is considered good for the Indian economy when commodity prices are in bullish mode. It would also set up opportunity for RBI to pump rupee liquidity without use of CRR cut and OMO bond purchases. The strategy of MARKET PULSE was to sell 1-10Y dollars on rupee weakness into 56.00-57.50 while providing comfort to importers not to panic on dollar payables beyond 1-2 months. Now, both global and domestic cues are strongly in favour of rupee for extended gains into 53 (not ruling out further extension into 52.00-51.90) where it would be prudent to unwind part of short dollar positions. Let us also watch out for aggressive RBI presence at 53-52 to protect exporters’ interest and to release rupees into the system to meet advance tax outflows.
EUR/USD is set to extend its rally beyond 1.3250 (on USD Index below 78.10) for minimum 1.3475-1.3500 to complete back-and-forth move between the set strategic sell zone of 1.32-1.35 and buy zone of 1.22-1.19. The strategy is to hold on to long EUR/USD position with trail stop below 1.3000/1.2850 for 1.3450-1.3500. The expectation thereafter is for further extension into 1.3850-1.4150 and to bring the focus into 1.4939.
Interest rate market
It is not clear at this stage whether RBI will get into growth supportive monetary stance despite some bold measures from the Government to address issues related to fiscal consolidation and policy paralysis. There seems to be no concerns over liquidity, thus ruling out CRR cuts and OMO bond purchases. RBI can now pump in liquidity through USD purchases. It is now time for 10Y Bond yield to break out of familiar 8.10-8.25% range to set up a new near/short term trading range with objective at 8.02-7.97 while weakness into 8.10-8.15% is considered good to invest. Strategic investors who are already invested on recent weakness into 8.25% can add at 8.15% for exit at 8.02-7.97%. Let us watch near term trading range at 8.0-8.15% with bias into lower end.
It is matter of time for benchmark overnight MIBOR to ease below 8%. It is to be seen whether it is done through rate cut or shift of system liquidity from deficit to surplus. The sudden shift of operative policy rate from 8% to 7% may be seen as risk to inflation by RBI, hence RBI may choose to maintain operative policy rate at Repo rate (with deficit system liquidity of 1% of NDTL) and provide 25-50 bps rate cut. The possibility of overnight MIBOR at 7.75-7.50% in the near/short term would drive 1Y OIS rate into 7.50 and 5Y OIS rate into 7.0%. The near/short term trading range is now set at 7.50-7.75% (1Y) and 7.0-7.25% (5Y) with bias into lower end.
Equity market
It is party time for Indian equity market despite suspect macroeconomic fundamentals. The sovereign rating downgrade fear is out of the way now. The loose monetary policy in western economies till 2015, some bold steps from the Government to open up FDI and shift into growth supportive monetary stance (sooner than later) will act as boosters for extended rally. It may not be difficult to take out immediate strong resistance at 5630 for extended rally into 5700-5740 to get the focus into 5944. We have now shifted into new near/short term range of 5500-6000 and it is prudent to make way for the bulls into the street.
Commodity market
MARKET PULSE looked for rally in Gold into 1735 on release of QE3. FED delivered beyond expectation to get the focus now into 1790-1802 in the immediate term. Beyond there, 1920 will be at risk. Let us set our focus at test/break of 1802 for gradual extension into 1920.
NYMEX Crude has hit the set target at 100 to complete back-and-forth move between 75-100. MARKET PULSE asked OMCs to hedge near/short term liabilities on move into 75. The risk now is for extended rally into 106.43 and 110.55 driven by easy global liquidity and tensions in the Middle East. The near term range is now set at 95-110 with bias into higher end.
Moses Harding
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