USD retains carry-trade advantage against major currencies
US economy retains its economic advantage over developed economies; extended ultra-easy money policy of Euro zone, UK and Japan extend advantage to the USD in a platter for at least next couple of years, if not more! This stance has already driven DXY from 84.50 to 88.35 driving Euro down from 1.2885 to 1.2537, JPY down from 105.18 to 118.96 and GBP down from 1.6524 to 1.5588. There is no relief for major currencies as USD emerge stronger till economic recession worries are out of the way! What next?
DXY is at striking distance of 88.75-89.65 target for completion of the chase from 84.50-84.75. The high so far is at 88.39 with strong weekly close above 88.25 at 88.28. The set consolidation focus at 87.25-88.25 is done with bias now into 88.75 ahead of 89.65 with near-term base lifted up at 87.50-87.75. For now, let us retain focus at 87.50/87.75-88.75; short term bias for shift into higher trading range at 87.25/88.25-91.50/92.50 is pulled into the radar.
EUR/USD correction process set within 1.2350/1.2400-1.2585/1.2635 is done with 1.2357 to 1.2599 to 1.2373 with weak weekly close at 1.2388, thus pulling 1.2050 into near-term focus while 1.2485-1.2500 seen heavy. For now, let us watch 1.2000/1.2050-1.2450/1.2500 with bias into lower end; be with bear-run chase!
USD/JPY complete the chase from 105-105.50 to 118.50-120.00; up from 105.18 to 118.96 at break-neck speed since 15th October. The correction from below 119 is shallow at 117.33 with firm weekly close at 117.80, thus retaining near/short term bullish undertone with next target at 124.16 (high of June 2007 which triggered multi-year reversal into October 2011 low at 75.55). While the multi-year relief from 75.55 to 119 brings cheer to Japanese exporters, economic recession and inability to script revival plans is serious concern for Japanese authorities. For now, let us set focus at 115.50/116.50-119/120 with bias into higher end, preparing steam for extended bull-run into 124.00, to complete the back-and-forth of 124.16 to 75.55 move.
GBP/USD intra-year fall from 1.7191 is steep with low at 1.5588. The confirmation of extended bear-run is from conclusive break below 1.6000. The immediate mild support is seen at 1.5560-1.5585 with firm resistance at 1.5725 (ahead of 1.5825); bias however is for extended weakness into 1.5300-1.5350. For now, let us focus our attention at 1.5300/1.5350-1.5700/1.5750 with bias into lower end.
Rupee cues mixed between strong domestic cues, robust external flows and need to maintain export competitive valuation
Post the excessive volatility since July 2013 (53 to 69 to 58), Rupee is now seen steady at 61/61.50-63/63.50, adjusting to REER. While it is easy for RBI to provide protection at the lower end, it may be tough to protect Rupee at 63-63.50 if FIIs turn net sellers in equity and bond markets for whatever reasons - profit booking or fear of hot-to-hold valuation or bond spread squeeze etc. MARKET PULSE outlook for 2014 is for Rupee consolidation at 58-63; saw Rupee recovery from January low of 63.32 to high of 58.33 in May, and thereafter in back-and-forth mode at 60-62 (61.74 to 60.20 to 62.22). The set near-term (October-December 2014) strategic focus at 60.95-61.95/62.20 is also done ahead of time, with move from 60.92 to 62.22 for SOS call to RBI to cut importer's scare (and pain on unhedged exposure); RBI did help to restore order for push-back to lower end of pre-policy focus range of 61.70-61.95/62.20 with comfortable weekly close at 61.76. In the process, 12M $ traded end-to-end from 65.50 to 66.50-67.00 (considered good for LTFX exports and carry-trade flows) and 6M $ up from 63.25 to 64.25-64.75. What next?
There no fresh cues to suggest review of set October-December focus at 60.95/61.20-61.95/62.20 and into December at 61.45/61.70-62.20 for 2014 close at 62.10-62.35. With USD in extended bullish undertone against major and EM currencies and India valuation seen stretched in the short term (December to February Budget 2015), downside risk is not ruled out for shift of focus at 61.45/61.70-62.85/63.35 for FY15 close around 63. RBI has reasons to build reserves not only to cover 10-12 months of import but also to build strength to ring-fence Rupee fair-value from FII sudden & lumpy exit. Given the mixed cues, it is not prudent to stay over-weight on risk either-way; good to stay risk-off tracking end Dec'14 $ range at 61.85/62.00-62.35/62.50; end Mar'15 $ at 63.00/63.15-63.50/63.65 (break-out either-way is excessive, hence not to sustain for long!). Strategic traders/carry-trade borrowers/investors continue to track 6M $ at 63.25-64.25/64.75 and 12M $ at 65.50-66.50/67.00. While macro fundamentals stay supportive to Rupee over long term, short term pressure is from FII mood-swings and need for exchange rate to stay supportive for exports and inflows till strategic woes around CAD is out of the way! All taken, strategy for exporters is to absorb (and support) extended (and sudden) weakness on Rupee (avoiding greed) while importers avoid taking things for granted taking comfort from RBI rescue! For now (ahead of RBI policy), see Rupee steady at 61.45/61.70-61.95/62.20 with USD/INR long-term base lifted up from 60.70 to 61.20 while preparing for end of FY15 range shift to 61.95/62.20-63.10/63.35.
Moses Harding
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