Weekly report for 31/12/12 - 04/01/2013

MARKET PULSE: Weekly report for 31^st December – 04^th January 2013

Currency market

Rupee held nicely despite bunched up month/year end dollar demand for smart recovery from low of 55.26 for weekly close at 54.76. MARKET PULSE has set near/short term trading range of 53.85/54.10-55.10/55.35 and considered good to cover 3-12M exports at 55.10-55.35 and hedge 15-45 days imports at 54.10-53.85. As trading strategy, it was urged not to stay “short” dollars below 54.10 and avoid “long” dollars above 55.10. Since then, recovery in rupee from recent low of 55.88 held at 54.04 for sharp reversal into 55.26. What next? The strategy is unchanged and there is no strong momentum either-way to break out of 54.10-55.10 consolidation within set short term USD/INR range play at 53.50-55.50. This range is expected to hold till March 2013 when more clarity would emerge from FY14 Union Budget and impact of US “fiscal cliff” on asset markets (and USD Index). Rupee derives good comfort from strong off-shore inflows into debt/equity capital market but not seen good enough to set up rupee bullish undertone (beyond 54.10-53.85) given the mixed signals in the Indian economy. For the week, let us watch consolidation at 54.35-55.00 with bias into lower end; extension if any to stay limited to 54.10-55.25. The strategy is to retain “short” dollar book entered for March 2013 at 55.85-56.00 (current 55.65) and 12M dollars entered at/above 58.50 (current 57.89); add on spot weakness into 55.00-55.25 and stay prepared to close the book on spot gains into 54.10-53.85. The short term range for 3M dollars is seen at 54.75/54.90-55.85/56.00 and for 12M dollars at 57.00/57.25-58.50/58.75.

USD Index traded end-to-end of 79-80, posting strong recovery from low of 79.01 to high of 79.93 before close of week at 79.65. USD Index is struck between weak JPY and steady (to strong) Euro. In the meanwhile, EUR/USD traded end-to-end of set buy zone of 1.3140-1.3165 (low of 1.3166) and strong resistance at 1.3285-1.3310 (high of 1.3284) before close of week at 1.3220. What next? The short/medium undertone for the US Dollar is bearish but needs confirmation from resolution to fiscal cliff. There may not be either “shock” or “awe” feeling to trigger major move either-way. For the week, let us continue to watch consolidation at 1.3100/1.3150-1.3300/1.3350. It is good risk-reward to trade end-to-end by buying at 1.3150-1.3100 and selling at 1.3300-1.3350 with tight stop on break thereof.

USD/JPY took out strong resistance zone at 84.32-84.61 easily on aggressive QE from BOJ. The extended weakness of JPY above 85.50 has now opened up further extension into 88-91 in the immediate/near term. The short term range is seen to be shifted to 85-90/95 with bias into higher end. For the week, let us watch 84.80/85.50-87.20/87.90 with bias into higher end. The strategy is to stay “long” on correction below 85.50 for 90.50-91.00.

Interest rate market

10Y Bond/OIS market traded to the script; 10Y yield is down from 8.18% to 8.10%, 1Y OIS rate down from 7.68 to 7.62% and 5Y OIS rate down from 7.18% to 7.13%. In the intra-week update, MARKET PULSE urged to unwind “long” bond book entered at 8.18-8.23% and advised not to chase gains beyond 8.10% for correction into 8.13-8.15% for re-entry. What next? Bond market derives good support from aggressive OMO bond purchases by RBI for twin objective of trimming excess SLR holding in the system and cut draw-down from LAF counter. RBI continues to stay concerned on low real interest rate that would discourage savings and divert funds to Gold and real estate. It would be period of consolidation till more clarity emerges from headline inflation print and quantum of additional market borrowing. There may not be enough demand (and appetite) for bonds at lower yields to absorb pipe-line supplies from RBI. The upside risk to inflation will come into play on proposed fuel price hike and higher MSP for agro products. For the week, let us watch consolidation in 10Y Bond at 8.08/8.10-8.13/8.15, 1Y OIS rate at 7.58-7.67% and 5Y OIS rate at 7.08-7.17%. The strategy is to trade end-to-end of set ranges as test/break either-way not expected to sustain. Strategic players can reinstate “long” bond book at 8.13-8.15% (keeping appetite for 8.17-8.19%) for March 2013 target at 8.03-8.0%. RBI may need to maintain 10Y Bond yield at 8.08-8.18%. Banks can trim excess SLR at 8.10-8.08% (and book profit on sale of investments) while weakness into 8.16-8.18% will keep investor appetite intact to absorb RBI’s bond supplies. RBI can accelerate bond supplies at 8.10-8.08% and push OMOs at 8.16-8.18% to administer consolidation play within 8.08-8.18%.

FX premium traded end-to-end of set ranges of 6.60-7.0% (3M) and 5.70-6.10% (12M); initial move into higher end met with strong support for sharp push back into the lower end. Over all, FX premium has traded end-to-end of set near/short term ranges of 6.15-7.15% (3M) and 5.40-6.10% (12M) and now seen in consolidation mode at “inner ring” of 6.40-6.90% in 3M and 5.55-5.95% in 12M. For the week, let us watch 6.40-6.90% (3M) and 5.55-5.95% (12M). The strategy is to trade end-to-end as test/break either-way not expected to sustain. Strategy players can retain “received book” entered at 6.05-6.15% and add at 5.85-5.95% for 5.50-5.40%.

Equity market

NIFTY is boxed between strong short term support zone of 5840-5790 and immediate term resistance at 5930-5980; posted intra-week low of 5844 and high of 5930 before close at 5908. What next? It will be period of consolidation as domestic cues are mixed (to negative) while FIIs continue to show strong appetite ahead of rate reversal cycle. FIIs are seen to have good comfort (and confidence) on policy reforms; fiscal consolidation and shift into growth supportive monetary policy while domestic investors are suspect on growth, inflation and fiscal deficit. FIIs do not seem to have many alternate options in their domestic markets and cannot afford to stay in cash with near zero short term interest rate/yield. For the week, let us watch 5840/5865-5965/5990; there may not be strong momentum for break-out either way. It would be good for traders to play end-to-end with tight stop on break thereof while strategic investors to retain “long” entered at 5880/5840 for 6060 (and thereafter into 6181).

Commodity market

Gold is struck in the “inner ring” of set immediate term range play at 1635/1650-1670/1685 range posting intra-week low of 1651.60 and high of 1667.50. The current consolidation phase (ahead of resolution to the US fiscal cliff) after sharp $160 drop from 1795 to 1635 is in order. For the week, let us continue to watch consolidation at 1635/1650-1670/1685 while there may not be strong momentum for break out of 1635-1685 range. The strategy for traders is to play end-to-end with tight stop on break thereof. Strategic investors who chased the move from 1795 to 1635 can look to reinstate “shorts” at 1675-1690 with stop at 1705 for 1590-1600.

NYMEX Crude traded end-to-end of 88.50-91.50 range (low of 88.20 and high of 91.49) before close of week at 90.60. The reversal from recent low of 85.21 into 91.49 is sharp. The near/short term undertone is bearish to take out 85.21 and prepare momentum for extension into 2012 low of 77.28. For the week, let us watch 88.25-91.50/93.00; bullish momentum into 91.50-93.00 will be difficult to sustain and prepare momentum for test/break of lower end into 85.20. The strategy is to stay “short” at 91.50-93.00 with tight stop for 85.25-83.75.

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