Rupee in solid form despite RBI brakes
Rupee retains bullish undertone despite several risk factors in play; post the sharp reversal from 61.29 to 62.45, it is in administered mode at 62.10-62.45. USD/INR is firm around 62.10 deriving support from importers (hedging end Mar'15 $ at 62.50-62.65 to stay guarded against sharp upside adjustment) and RBI $ bids (evident from record high reserves), while exporters provide protection at 62.45 covering end Mar'15 at 62.85-63.00 and carry-trade interest around 12M $ at 66.85-67.00. What next?
The positive cues are from abundant supplies in cash market (by FIIs) and lead-lag play in forward market (by exporters & importers); combination of confidence on India equity & bond assets and elevated FX premium, is strong to retain Rupee bullish rhythm. Beyond here, more bullish cues; are in store from pro-growth/fiscal prudence FY16 Budget, pipe-line rate-cut and sovereign rating upgrade. All taken, the market dynamics is skewed towards net $ supplies (cash & forward supplies against cash demand), and RBI seen to administer demand-supply equilibrium absorbing excess $ supplies. The hedging strategy is in favour of hedging short term (1-2 months) imports at forward rate of 62.50-63.00 and covering medium/long term (3-12 months) at forward rate of 64-67/67.50. All combined, see Rupee stability at 62-63; break-out risk is from release of brake by RBI (shifting focus to 61.00-61.35) and FII unwind (diluting Rupee bullish momentum for weakness into 63.65-64.00). Having said all these, Rupee resilience to India-US yield squeeze can't be taken for granted beyond a point. 10Y Gilt spread at 5% (India at 7.35-7.50% and US at 2.35-2.50%) is seen as the breaking point while India inflation stays at 4-6%, with caution that the best from Brent Crude price impact is behind. Taking all these long term cues in play, it is prudent to track spot moves in alignment with 12M USD/INR at 65.50/66.00-68.00/68.50, and have close watch on FED rate action and its impact on DXY. For the week, retain focus at 61.95/62.00-62.45/62.50 with bias for back-and-forth play, break-out either-way difficult to sustain.
EUR/INR is in back-and-forth mode at 70/70.25-71.00/71.25 (within big-picture focus at 68.00/68.50-72.00/72.50). In the near term, see strong resistance at/below 71.00 with build-up of bearish momentum into/below 69.00-69.50. It is not the time to keep near/short/medium term exports open, given the combination of bullish undertone in USD/INR and bearish pressure on EUR/USD.
USD retains its bullish consolidation mode against major currencies
It is no surprise to see DXY in back-and-forth mode at 93.50/93.65-95.00/95.15 (within set near-term big-picture at 93.25-95.50). Not withstanding temporary near-term relief from Greece risk factor, short/medium/long term cues would emerge in favour of the USD; bias therefore is for upside break over 95.50 into 100 in the short/medium term. For now, see no reasons to review the set focus at 93.25-95.50, not ruling out set up of bullish momentum for push over 95.50.
EUR/USD is steady at 1.13-1.1450 (post the recent recovery from 1.11 to 1.1525). The best case scenario is seen for near-term consolidation at 1.10/1.1075-1.1450/1.1525 before break down, while major Central Banks will resist extended weakness below 1.10 to avoid pulling parity into focus. It is prudent to stay end-to-end in back-and-forth play.
USD/JPY is seen stuck at 116/117-120/121, with no major cues to trigger break-out either-way. There are no cues to review set strategic big-picture focus at 115/116.50-123.50/125.
Have a great week ahead!
Moses Harding
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