Equity market:
DJIA index failure at higher end of 17850-18100 consolidation zone (2014 high at 18103) for 2014 close below 17850 (at 17823) is worry; first signal for validation of set consolidation outlook in 2015!? What is the trading range to track in the near term? Watch out for immediate resistance at 17991-18103 with minor support at 17585-17600 and strategic support zone at 17050-17300. At this point of time, there are no major triggers to upset the mild bullish undertone taking comfort from economic turnaround signals and extension of liquidity support to financial investors, whose mood is seen to be shifting between risk-on and risk-neutral with hope that developed markets would outperform emerging markets in 2015. For now, let us set our trading focus in DJIA index at 17550/17600-18100/18150 and stay neutral on break-out bias into 18350 or 17300; good to play end-to-end being with the price momentum either-way!
NIFTY struggle at minor resistance zone of 8285-8300 ahead of 8365-8400 is worry for the bulls; not seen as a great start into 2015, but not to be viewed as panic while minor support zone is firm at 8200-8215 ahead of 8130-8165, strongly supported by strategic investors. There is no major risks on the Indian economy; growth is in uptrend, CAD & inflation worries are behind and fiscal deficit will be managed, as before around 4% for FY15. All taken, India macroeconomic fundamentals will be in much better shape than what it was in 2013-2014. There are signs of slow-down in policy activation, but the intent is strong; need to give the benefit of doubt that it could go only better into 2015 and beyond! Taking all these dynamics in play retain the outlook for near-term consolidation at 8150-8400, mid-point of strategic investment zone of 7950-8600; at this stage, prefer to keep 7700-7750 outside the radar which is seen as worst case for 2015 & beyond. For now, let us stay focused at 8150-8300 retaining break-out bias into 8365-8400. Need big-time FII play to pull focus below 8135-8150 into 7950-7965, not preferred at this stage.
Bank NIFTY has major resistance at 18875-18925 with minor support at 18400-18450 ahead of 18200. The outlook is not gloomy despite high valuation of private sector bank stocks posting great returns in 2014. The upside in 2015 will be from public sector banks who are in reform process, outcome of which would translate to higher productivity and efficiency. Bank Stocks will obviously gain the most from economic turnaround (in 2015 and beyond) resulting in better NII and marginal relief from NPA. The shift into rate cut mode will emerge beneficial to PSU banks from better NIM and higher other income from profit on sale of investments. While dynamics are mixed, most cues suggest sustainability of bullish undertone into 2015. For now, let us set our focus at 18200/18450-18950 not ruling out extended gains into 19250; good to play end-to-end!
Currency market:
DXY posted firm 2014 close at 90.27 post sideways mode at set consolidation range of 89.50/89.75-90.25/90.50. This is the first signal for more to come in 2015. The step-up in strategic base is firm, from 84.50 to 87.50 and now momentum seen good for the next step-up into 90.50-92.50 ahead of 95-110 (just for reference for the big-picture ahead!). For now, let us set focus at 89.50/90.00-92.50/93.00; strategy is stay in buy-dips mode to be with the chase of bull-run.
EUR/USD closed 2014 with very bearish undertone for close just short of 1.2050 target (low at 1.2095). In traction with DXY, step-down from 1.40 is steep at 1.21 with next target at 1.1650-1.1875. Most cues favour the US Dollar against Euro and any short-squeeze driven recovery will be seen as relief and not trend reversal; strategy to be in sell-on-recovery mode is valid. For now, let us stay focused at 1.1875-1.2175/1.2225 with bias into lower end.
USD/JPY failed for close at higher end set consolidation range at 118.50/120-123.50/125; comfort is from hold at 118.84 and worry is from failure for 2014 close above psychological 120. Nevertheless, need to give benefit to exporter short-squeeze for 2014 year end post intra-2014 relief rally from mid October low of 105.18. Most cues stay in favour of USD against the JPY to retain the bullish undertone. For now, see strategic 2015 support at 115.00-115.50 for bias into 123.50-125.00; retain buy dips mode into lower end of near-term support zone of 118.50-120.
USD/INR traded to the script; step-up valuation from 61.70-61.80 to 63.80-63.90 before consolidation for back-and-forth play at 62.95-63.10 and 63.70-63.85; hedge strategy to stay risk-off at either-end on exposure till end March 2015, if not beyond has come out good. In the process, 12M USD/INR got re-rated from 66.00-66.25 to 68.00-68.25 before back-and-forth consolidation at 67.25-68.00/68.25. Two questions emerge critical when stake holders appetite is either risk-off or risk-neutral! How strong is FII/FDI pipe-line in 2015? Why and to what extent RBI should stay in $ buy mode? While not sure of extent of FII appetite, FDI flows should be in plenty at least in relative terms. RBI has been in USD defence mode in 2014 absorbing FII supplies to maintain demand-supply equilibrium. There is debate on why RBI should resort to USD support stance incurring negative-carry and giving exchange rate advantage to FIIs. There is no choice, as excessive Rupee gains will only bring non-RBI $ bids, also triggering FII reverse flow. At this stage, RBI has to stay in $ buy mode to cut excessive price volatility and to retain FII appetite by offering cheap Rupee. Given this scenario and against the USD bullish momentum, it is safe to assume that USD/INR has firm 2015 base at 62.85-63.10 with pull towards 63.85-64.15, not ruling out possibility of end FY15 target at 64.85-65.35. Rupee relief below 62.85-63.10 can be from RBI step-out from $ buy mode and/or sharp unwind of USD gains of 2014; both are low probability occurrence! For now, find no reasons to review set focus at 62.95/63.10-63.95/64.10. Retain hedge strategy to cover end Mar'15 exports at 64.85-65.10 and importers to stay risk-off at 62.95-63.10. Trading (and carry-trade) strategy is for back-and-forth play on 12M USD/INR at 67.00/67.25-68.25/68.50.
Gilts market:
It is great start for India 10Y bond (8.40% 2024) extending gains into 7.75-7.85% and momentum looks good for completion of back-and-forth moves between set exit zone of 7.75-7.80% and reinvest zone of 8.0-8.05% for fleet-footed play. The relief is from rate-cut expectation and stability in US 10Y Treasury yield at 2.10-2.25%, thereby retaining the India-US bond spread at acceptable level of 5.60-5.75%. There are no major triggers to upset current bullish stability, hence let us set focus at 7.75/7.80-7.90/7.95% for back-and-forth play. It is prudent to expect good supply at lower end (against reduced demand) from FII exit, unwind of excess SLR book and cutting the duration of SLR book through churn from longer to shorter tenor.
Wish you all a great & profitable 2015!
Moses Harding
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