Weekly report for 24-28 September 2012

MARKET PULSE : Weekly report for 24-28 September 2012

Currency market

Rupee has out-performed its peers since June 2012 with 6.76% recovery from the recent low of 57.33. The recovery is not significant compared to strong two wave attack on rupee; first from the Euro zone in July 2011 pushing rupee down from 43.85 and the next from post Budget FY13 jitters in February 2012 driving rupee down from 48.60. It was a mix of both domestic and external cues which drove rupee down by over 30% from 43.85 to 57.33 from July 2011 to June 2012; recovery of 6.76% against fall of over 30% is not enough.  Now factors that drove rupee down have turned supportive. There are strong tailwinds from external sector post roll-out of QE3 and affirmation of loose monetary policy till 2015. On the domestic front, there have been decisive actions from the Government to address twin deficits through appropriate policy actions despite opposition. Clearly, there is turnaround in sentiments and confidence across all fronts, be it investments or capacity creation or consumption. The only risk factor is seen from higher commodity prices which could stroke inflation to dilute RBI’s growth supportive stance. But, sharp reversal in crude oil price post QE3 announcement provides great comfort. It is also possible that higher commodity prices may well be off-set by rupee appreciation. Over all, most factors (if not all) favour strong bullish undertone for rupee. If there would be action from global rating agencies to reinstate positive outlook ahead of upgrade, it would be extended bull-run for rupee.

The focus is now on to the extent of reversal into 48.60 or 43.85 from the recent low of 57.33; at current level (of 53.45), rupee has recovered 25% of its fall from 43.85 to 57.33. Rupee bullish forces are so strong that moves in USD/INR have lost its traction with movements in USD Index and EUR/USD; strong dollar against major currencies has less impact on rupee and accelerated rupee gains on weak dollar. NDF dollar is trading at good discount tracking strong off-shore appetite for Indian assets. At this stage, there is no single negative factor for rupee to look for reversal of recent gains. The immediate target for USD/INR is at 53.00-52.95 ahead of 52.20-51.95. If all goes well thereafter, rupee should extend its bullish momentum into 50.60-50.45 ahead of 49.00. It will be very low probability for rupee to fall beyond 54.00-54.15 and would be safe to hold on to “short dollar” positions with stop loss above 54.15 for the set objectives. MARKET PULSE was a dollar bull from 48 to 57; shifted stance to rupee bull from 57 for 52 asking exporters to sell 1-10Y receivables and borrowers to shift rupee liabilities to USD at 56-57.50. Now, the set objective at 52 is reviewed to 49 with trail stop above 54.15. This sets up a short/medium term range play at 49-54 with bias into lower end. For the week, let us watch 52-54 and retain rupee bullish undertone into the first objective at 52.20-51.95; any mild correction from gains in USD Index should attract good supplies at 53.55-53.65 and 53.90-54.05. The strategy is to add to “shorts” at these levels for set objectives into 52-49 with stop above 54.15.

QE3 driven rally in EUR/USD from 1.2040 to 1.3169 is losing steam; steep fall in USD Index from 84.10 found solid support at 78.60 for decent bounce into strong resistance at 79.60-79.90 (pushing EUR/USD down into 1.2910) and now seen to be in consolidation mode at 78.90-79.60 with extension limited to 78.60-79.90. This expectation sets up consolidation play in EUR/USD in the immediate term within 1.2945-1.3060 with extension limited to 1.2895-1.3110. The strategy is to play end-to-end of 1.29-1.31 range. Over all, consolidation in USD Index at 78.60-79.90 is seen as correction process before extending its bearish momentum into 77.00 (EUR/USD at 1.3350-1.3375) ahead of 76.00 (EUR/USD at 1.3500-1.3525). This move should complete the reversal process that we looked for from 1.2150-1.2250 into 1.32-1.35.

The BOJ driven rally in USD/JPY from 77.25-77.00 lost steam at 79.00-79.25 and now into consolidation mode around 78.00. The moves are in tune with the expected consolidation at 77-79. The near/short term bias is for test/break of recent high at 79.22 to get back into 80-85 consolidation. While keeping this in mind, let us watch 77.25-79.25 consolidation during this week. The strategy is to buy on dips in two lots at 77.85-77.60 and 77.35-77.10 with stop at 76.85 for 79.10-79.25 and 80.45-80.60.

Interest rate market

There is clarity on the way forward; Government has addressed issues relating to fiscal deficit and supply side concerns through subsidy cut and creating favourable investment environment. The risk on inflation from higher commodity prices is diluted as post QE3 rally in Crude Oil price met with stiff resistance. The sharp appreciation in rupee is not yet factored in. The impact of CAD on exchange rate is also relevant given the opening up of flood gate for flows into debt/equity capital market; favourable Balance of Payment and supply driven mode in the FX forward market would arrest uptrend in inflation. There is now confidence that inflation will trend down below 7% into RBI’s comfort level of 6% by end of FY13. RBI has already taken a mild dovish monetary policy stance; in due course, operative policy rate will move down from 8% (into 7%) either through rate cut or shift of system liquidity from deficit to surplus. RBI has lot of options to infuse liquidity either through OMO bond purchases in Money Market or USD purchases in FX Market or CRR cut. There is now stability in 1Y OIS rate above 7.70%; 5Y OIS rate above 7.15% and 10Y Bond yield above 8.15%. It is positive that Bond market is not into bearish set up despite no rate cut (and OMOs), spike in LAF draw-down and pipe-line auctions in H2. Taking all these bullish conditions into account, short/medium term targets are set at 7.50-7.45% (1Y OIS); 7.0-6.95% (5Y OIS) and 7.90-7.75% (10Y Bond). For the week, let us watch 7.60-7.75% (1Y OIS); 7.05-7.20% (5Y OIS) and 8.05-8.20% (10Y Bond). The strategy is to stay invested in 10Y Bond at 8.17-8.20% and received in 5Y OIS at 7.17-7.20% for set objectives.

Equity market

NIFTY has not only recovered its post Budget FY13 losses from 5630 to 4770 but has extended its gains into 5700 for strong weekly close at 5691. The close above 2012 high of 5630 is very bullish into short/medium term. Having unwound post FY13 Budget jitters, now focus is shifted to recover pre Euro zone crisis high of 6338 (seen in November 2010) and pre Lehman Brothers crisis high of 6357 (January 2008). It is huge relief for strategic investors who stay invested through 2008-2010 for recovery of the capital if not the time value. The immediate hurdle for the bulls is at 5740-5750 but momentum is strong for extension into 5835/5960 and 6000-6015 to complete end-to-end move of set near term range of 5500-6000. For the week, let us watch 5630-5980; test/break either-way to attract. The strategy is to hold on to investments and add on correction into 5630-5550 for 6000.

Commodity market

Gold has gained the most from QE3 with gain of over 17% from 1527 to 1787. MARKET PULSE rode the sharp fall from 1920 (September 2011) to 1525 and back to current levels by identifying 1535-1485 as strong long term support zone for the Gold. The party is not yet over for Gold as it would continue to stay with the shine into short/medium term. The weak undertone of the dollar and inflationary expectations in the Western economies (triggered by lose monetary policy) has made Gold as safe-haven asset (replacing the US dollar). The focus now is on the September 2011 high of 1920 with immediate objective at 1835; test/break here would extend bullish momentum into 1920. For the week, let us watch 1765-1835 with bias into higher end. The strategy is to add on to “longs” at 1765-1750 for set objectives.

QE3 driven rally in NYMEX Crude failed at strong resistance at 100 and reversal from there found support at 90 to complete its back-and-forth move between set near/short term range of 90-100. It is good comfort for the Global economy that impact of weak dollar is not factored into the crude oil price. Let us continue to look for near/short term consolidation at 90-100; test/break either-way would set up low risk-high reward trade opportunities. For the week, let us watch 90-94 not ruling out test/break of higher end into 97.50-100.00.

Have a great week ahead.................................Moses Harding