Weekly report for 7-11 January 2013

MARKET PULSE: Weekly report for 07-11 January 2013

Currency market

USD/INR traded back-and-forth of set weekly range of 54.10/54.35-55.00/55.25 (intra-week low of 54.26 and high of 55.17); down from 55.00 to 54.26 and then up to 55.17 before close of week at 55.07. In the process, value of forward dollar swung end-to-end within set ranges of 54.90-56.00 (3M) and 57.25-58.50. What next? The undertone continues to remain weak (and suspect) for rupee driven by concerns on widening Current Account deficit, downside risks on macroeconomic fundamentals and fear of cut in FII flows post hawkish stance of FED on excess liquidity, ruling out extension of QE4. But, there is no need to throw in the towel (and give up on rupee) as yet. Government is on over-drive with measures to add momentum to growth and cut fiscal deficit. There are pipe-line measures to cut non-essential imports to reduce Current Account deficit, and red carpet is rolled out to off-shore investors to maintain surplus Balance of Payment at all times to avoid pressure on Rupee exchange rate. The risk however is from signs of improvement in Western economies (resultant dilution in abundant liquidity support), and deterioration in domestic macroeconomic fundamentals (or delay in bullish reversal for whatever reasons) can pose serious concerns on availability of off-shore liquidity (and appetite) for India’s debt and equity markets. Taking all these fundamental factors in play, MARKET PULSE preferred short term range trade for USD/INR at 54-56 till February/March 2013; post that, the pair rallied to 55.88 (into set sell zone of 55.65-55.90) and reversed sharply to 54.04 (set buy zone of 53.85-54.10) and now at mid-point of 54-56 range. Now, Rupee is seen to have shifted into higher range trade at 54.35/54.60-55.40/55.65 with extension limited to 54-56. There is no clarity on break-out direction, hence prudent to trade end-to-end (with stop/double reverse strategy), rather than being biased on particular direction. The hedging strategy is to stay covered on near/short term FC liabilities on move into lower end and to hedge medium/long term FC assets on move into higher end. The hedging strategy needs to be dynamic to unwind import hedge at higher end and uncover export hedge at lower end for maximum reward.  For the week, let us watch consolidation at 54.60-55.40 (USD Index at 80.00-81.50). There is no clarity on break-out direction for extension into 54.00/54.35-55.65/56.00. Strategic players can trade end-to-end by buying in 3 lots at 54.65/54.40/54.05 (stop/reverse below 54 for 53.60/53.10/52.30) and selling in 3 lots at 55.35/55.60/55.95 (stop/reverse above 56 for 57.30-58.80). For hedging activity, 3M forward dollars at 56.25-56.50 and 12M dollars at 58.50-58.75 will look good for exporters. Watch (and trade end-to-end of) 3M forward dollars at 55.25/55.50-56.25/56.50 and 12M forward dollars at 57.60/57.75-58.50/58.65; test/break either-way will be difficult to sustain.

EUR/USD held at set intra-week resistance/sell zone at 1.3300-1.3350 (high at 1.3299) for sharp reversal into set support/strategic buy zone at 1.2990-1.3040 (low at 1.2997) before close of week at 1.3067. What next? The strong bearish set up on the US Dollar is now diluted and it would be period of consolidation in the near/short term till fresh cues emerge to provide clarity on directional break-out. The risk is for extension of gains in USD Index into 81.50 (EUR/USD around 1.2900) while 79.00-79.60 stays firm (EUR/USD at 1.3150-1.3200). For the week, let us watch consolidation in EUR/USD at 1.2875/1.2925-1.3100/1.3150 and prepare momentum for extension into 1.3300-1.3350. The strategy is to trade end-to-end. Strategic players can buy in 2 lots at 1.2965-1.2940 and 1.2890-1.2865 for back into 1.3285-1.3310 (with stop/reverse at 1.2850 for 1.2660 before strongly up). Over all, EUR/USD is seen to be boxed at 1.2650/1.2850-1.3150/1.3350 in the near term.

USD/JPY held at set support/buy zone of 85.50-86.25 (intra-week low at 85.68) and rallied into set objective at 88-90 (high of 88.40 before close of week at 88.12). The undertone is very bullish retaining the strong momentum since reversal from September 2012 low of 77.11. MARKET PULSE set new trading range at 85-90/95 on break of 85.50 and upward momentum since then is strong building steam for shift into higher range trade at 90-95 soon while 87.25-86.75 stays firm. For the week, let us watch 86.75/87.75-89.75/91.25 with bias into higher end. The strategy is to retain “long book”, add at 87.75-87.25 with stop below 86.75 for immediate objective at 89.75 and thereafter into 91.25-95.00.

Interest rate market

Bond market witnessed strong intra-week rally; 10Y Bond rallied from 8.10% into set near term objective at 7.90-7.93% before close of week at 7.93%. The speed of the rally from 8.10 to take out 7.90 without any fight for extended gains into 7.93% was bit of surprise (a pleasant one)! The trigger definitely is not from the cancellation of bond auctions as supplies are expected to be met with OMO bond purchases. There is build-up of over confidence on expectation of 50 bps rate cut at front-end of January-March 2013. The current yield at 7.93% has built in 25 bps rate cut on 29^th January policy review followed by another 25 bps cut in mid March mid quarter review. If this expectation builds steam, 10Y Bond yield will get into consolidation mode at 7.65-7.90%; any disappointment here will drive the yield back into 7.95-8.10%. RBI will get good comfort from Government’s actions to cut fiscal deficit. FED’s stance on liquidity will dilute RBI’s fear of commodity price risk on inflation (and twin deficits). RBI will base their rate cut decision on December 2012 headline WPI inflation print. The tolerance zone is seen at 6.50/7.0-7.5% for rate cut trigger. It would be critical for December 2012 print to be at lower end of 7.0-7.5% for 25 bps rate cut on 29^th January and any surprise move below 7.0% (into 6.5%) will push RBI to deliver one-shot 50 bps rate cut. On the other hand, print around 7.5% will delay shift into rate cut cycle, may be beyond March 2013! For the week, let us watch 7.87/7.90-7.97/8.0; test/break either-way to attract. The trading strategy is to trade end-to-end while strategic players can retain “long” entered at 8.18-8.23%, add at 7.97-8.0% and unwind part (or most) at 7.87-7.93%. It is not prudent to stay over confident on sharp reversal in rates given the huge downside risks from twin deficits and weak Rupee, hence extended gains beyond 7.90% will be seen as excessive till delivery of expectations.

OIS rates stayed steady at 7.58-7.61% (1Y) and 7.13-7.16% (5Y) and surprisingly did not track the sharp rally in Bond market. The concerns are from two factors: expectation of “hold” on operating policy rate at 7.5% (post 50 bps rate cut action in Q1/Q2 2013) till headwinds from twin deficits (on inflation) is completely out of the way and start of build up of steepness in the tenor. Bond spread (between 5Y Bond yield and 5Y OIS rate) is already down from over 1% to 75 bps and 1X5 OIS curve is steep down from over 60 bps to 45 bps. There is no strong momentum either-way and prefer consolidation around current levels not ruling out bullish momentum if Bond market gets into correction mode. For the week, let us watch consolidation at 7.55-7.65% in 1Y and 7.10-7.20% in 5Y. The trading strategy is to trade end-to-end. It may not be prudent to stay “paid” at/above 7.65/7.20 or stay “received” at/below 7.55/7.10 given the high risk-low reward there.

FX premium eased into 6.65% in 3M and 5.7% in 12M on combination of interest and exchange rate play driving the premium down from recent high/receive zone of 7% and 6.1% respectively. What next? At current level, interest rate impact is factored in and moves will be tuned to exchange rate play. The expectation of consolidation in spot rupee at 54.35/54.60-55.35/55.60 will provide consolidation at 6.50-6.85% in 3M and 5.60-5.85% in 12M. The strategy is to trade end-to-end with test/break either-way to attract. The near/short term range is firm at 6.15/6.35-6.85/7.0 (3M) and 5.45/5.60-5.95/6.10.

Equity market

2013 began on bullish note in the equity market; NIFTY rallied to meet the first objective at 6015-6040 (high at 6020) from intra-week low of 5897 before close of week at 6016. The expected 200 point rally from 5800-5840 (low of 5823) into 6000-6040 is now complete. What next? FIIs are the sole contributors to the super performance of NIFTY in 2012 and have stayed invested from December 2011 low of 4531 and June 2012 low of 4770. The risk-reward is not in favour for FIIs to stay invested from now on, hence there may be set up of correction process in the near/short term. Having made bumper profit in 2012 from India, FIIs might get better return in their domestic markets in 2013 or in other emerging markets which have underperformed in 2012. On the other hand, domestic cues are looking good in 2013 to attract domestic investors. Over all, it is mixed signals; when way forward is not clear, it is best to stay “light” on equity assets. For the week, let us watch consolidation at 5965/5980-6040/6065. Beyond there (into near/short term), maximum reward will be for extended gains into 6095/6120 (ahead of 6180) while downside risks can extend below 5880 (into 5823), risk-reward of less than 1:1 is not seen good for strategic investors at current level. It would be traders’ market while strategic investors prefer to stay “light” (or away!).

Commodity market

Gold traded end-to-end of set resistance/sell zone of 1690-1705 (high of 1694.70) and set support/buy zone of 1620-1635 (low of 1625.50) before close of week at 1656; moves driven by shift of “risk” into and post “fiscal cliff”. What next? Gold is now into familiar range trade at 1620/1635-1690/1705 with no strong momentum to trigger directional break-out. The short/medium tone is steady to bearish with risk of shift of appetite away from commodity assets on liquidity squeeze and turnaround in growth momentum. For the week, let us watch consolidation at 1620/1630-1670/1680 with extension limited to 1580/1595-1705/1720. The strategy is to trade end-to-end. Strategic investors can sell at 1680-1705 (with stop above 1720) and buy at 1620-1595 (with stop below 1580).

NYMEX Crude traded end-to-end of 90-95 range (with intra-week low of 90 and high of 93.87) before close around 93.00. There is lack of clarity on direction beyond 90-95, hence prudent to trade end-to-end with tight stop on break-out without having directional bias. However, near/short term trading range is seen firmly set at 85-100. For the week, let us watch consolidation at 88.50/90.00-93.50/95.00 with extension limited to 85.50/87-96.50/98.0. The strategy is to trade end-to-end. Strategic players can sell at 95-96.5 (with stop above 98) and buy at 88.50-87.00 (with stop below 85.50).

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