Global cues mixed, hence impact neutral
All attention on US economic data to get clarity on the timing of start of rate hike cycle. While there is no discomfort on the US economic recovery and downtrend in unemployment data, confidence from growth-inflation dynamics is low on sooner than later rate hike delivery from the FED. The stakeholders guesstimate is sometime between June to October 2015. Barring this, most cues from other large economies continue to stay as tailwinds for India asset markets. The lack (or diluted momentum) of supporting tailwinds from the US is adequately covered by domestic optimism. While there is no risk on long term FDI appetite for India, concerns have emerged from sustainability of hot money FII flows, who may like to take money off the table given the not so significant upside in FY16, post the strong valuation pick-up since August 2013 - May 2014. The high base effect will cut the bullish euphoria from here. It is possible that FIIs may take a short holiday from India for return in H2/FY16. All taken, impact from external sector on India markets will be neutral with limited pain or gain. The steady US unemployment data at 5.5% and low pick-up in weekly payrolls is relief into this week for India, but to stay in sideways mode between risk-on and risk-neutral. The rate-hike expectation swing between June to October 2015 will retain markets in consolidation mode without clarity on directional bias in the near term.
In the given mixed sentiment and lack of clarity on way forward, prefer stability in DJI index at 17000/17500-18000/18500, US 10Y Treasury yield at 1.80/1.85-2.0/2.05%, DXY at 96/96.50-99.00, Brent Crude at 52.50/54-57.50/59 and Gold at 1135/1150-1220/1235. There are no major cues to trigger break-out either-way. At this point, outlook is not in favour of June 2015 rate-hike, hence shift of sentiment from neutral to risk-on is the way to go this week. Beyond here, the next round of US economic data will set the tone for break-out of the said ranges either-way.
India optimism intact against improved macroeconomic fundamentals and RBI dovish monetary policy stance
Lot of policy initiatives and execution plans have come up in the 10 months of NaMo regime. While concerns remain on fiscal deficit and inflation, the worst is clearly behind and it could only improve from now on, with baby-steps in the short term (H1/FY16) and shifting gears to giant strides from FY17. The optimism now is from FY15 fiscal deficit at 3.9-4.1% and CPI stability around 5.5% till ease of pressure on food inflation before soft landing into 4-5% comfort zone. Given these evolving dynamics, it is fair to expect RBI action on 7th April review meet. It could be either 25 bps rate cut and/or 50 bps SLR cut and/or 50 bps CRR cut or combination of some of these to reaffirm RBI's stance for staying with growth supportive monetary policy, and to be seen in walking along with the Finance Ministry and the Government. The comfort from fiscal deficit, greater confidence on Rupee and the need to provide catalyst for lower lending rates would put pressure on RBI (not withstanding inflation worry) to deliver rate cut and/or effective liquidity action to ease short term money market rates. This outlook will drive bullish momentum into Equity, Gilts and Rupee markets.
Equity in recovery mode, but face major hurdles ahead of all-time high
After smooth bull run from the start of FY15, it was panic at the end; NIFTY was pushed down from all-time high of 9119 to 8269 by 9.32% and Bank NIFTY down by 15.24% from 20907 to 17719. The positive take-away is from set up of bullish momentum (from set fair-value zone in NIFTY at 8200-8300 and Bank NIFTY at 17500-17750) for smart recovery to 8600 and 18650 respectively to get the bulls back into the street. What next? The sentiment is positive ahead of monetary policy for extended NIFTY recovery beyond 8627 into 8785-8850 and Bank NIFTY beyond 18750 into 19350-19500. Will it sustain beyond here is the big question in play? The market is in "once bitten, twice shy" mode, post the 4th March rate-cut triggered collapse. For this week, pre policy support is firm for NIFTY at 8475-8525 and not beyond 8450-8465 (and Bank NIFTY firm support at 18300-18450, worst case not beyond 18050-18150). The strategy is to keep close watch at both ends, seen as extremes and would be high risk to chase overshoot beyond 8485/8550-8785/8850 and 18300/18450-19350/19500. The break-out bias beyond here is not clear now, and better to await clarity from FED and end FY15 India economic data. Till then, short term big-picture retained at 8200/8265-8785/8850 and 17600/17750-19350/19500. For strategic play for FY16, it is prudent to keep in mind the possibility of wild swings in NIFTY at 7950/8200-9000/9150 and Bank NIFTY at 16300/16650-20650/21000.
India Gilts firm, but in sideways mode on mixed cues
There is clarity on worst case in 10Y benchmark yield, which is at 7.75-7.80% but no clarity on to what extent short term bull run could extend within 7.50-7.65%. While CRR cut and/or rate cut is positive, minor risk is in the radar from SLR cut and/or alignment of HTM limit at/or below SLR. All combined, the short term consolidation range is seen at 7.50/7.60-7.70/7.80%. The strategic investment play for FY16 and beyond is to stay invested at 7.70-7.80% for 7.0-7.25%. The support for Gilts (and corporate bonds) will be firm on shift of investor appetite from equity to debt till clarity from the FED on timing and speed of rate-hike steps. At this stage, dilution in fear of June 2015 rate hike by FED (driving US 10Y bond yield into lower end of 1.80/1.85-2.0/2.05 range) will add fuel to bullish undertone for 7.55-7.70% play in India 10Y bond at yield spread of 5.75-5.85%.
Rupee stuck between devil and the deep sea
Rupee is at risk from contra stance between FED and RBI that would knock out the interest rate advantage. The devil is the medium term bullish set up of USD against major currencies (driving DXY above 100-100.50 on or before July - September 2015) and the deep sea is the squeeze in FX premium cutting $ supplies in the forward market. Balancing the impact will be RBI with huge $ appetite below 62, building ammunition power for Rupee protection at 63-64. As USD extends strength against global currencies, there will be pressure on RBI to adjust Rupee value to the comfort of exporters.
USD/INR has been in comfort zone at 61-63 with series of back-and-forth play, thus providing opportunities for importers to hedge short term liabilities at lower end and for exporters to cover medium/long term receivables at higher end. While most cues remained supportive to Rupee, RBI did extend protection to Rupee at 62.70-63.00 while absorbing excess $ supplies to squeeze the range play at 61.65/62.15-62.70/63.00. What next? Rupee is at risk of losing interest rate advantage (on ease in FX premium) and impact from USD bullish trend and reduction in FII flows, while the comfort is from sustainable FDI flows which may be lumpy but not consistent. So, RBI may need to turn to $ supply side till lumpy inflows can be absorbed into its books. This risk may not be relevant in the short term, but can not rule out rate adjustment in the medium term. The strategy so far was to sell 12M $ at 67.35-67.85 (for 66.50-66.65) with focus on end April 2015 $ in sideways mode at 62.20/62.35-63.00/63.15 (same range that was in focus for end Mar'15). It is now time to review this stance. All cues taken, USD/INR has solid long term support at 61.65-62.15 against risk of building bullish momentum beyond 62.55-62.70 into 62.95-63.20, not ruling out extension into 63.65-64.00. The strategy, therefore is to unwind short-dollar positions at spot 61.65-62.15. Importers need to cover 3M exposure at forward value of 62.85-63.35 and 12M at 66.00-66.50, while exporters stay aside for spike in 3M $ into 64.00-64.50 and 12M $ at 67.50-68.00 (post unwind of existing hedge entered at said levels). It is prudent to set NT focus at 61.95/62.20-62.55/62.70 with overshoot not beyond 61.65-63.00. For this week, spot USD/INR is seen in traction with end Apr'15 $ at 62.10/62.35-63.10/63.35, and good to unwind previous week short end April'15 $ entry at 63.10 on push-back into 62.10-62.35.
EUR/INR reversal from 69.25 held at 66.75-67.00, in alignment with EUR/USD push-back from 1.1050 to intermediate support zone of 1.07-1.0750, mid-point of NT focus zone of 1.0450/1.05-1.10/1.1050. The strategy to play end-to-end of 66/67-69/70 for big-picture has gone well. What next? There is near term relief for Euro with firm support at 1.07-1.0750 putting pressure at 1.10-1.1050 for 1.12-1.1250. The current EUR/INR value around 68.00 is at mid-point of 66/67-69/70 strategic focus zone with bias into 69-70, set as strategic short entry zone (for short term target below 66.75-67.00 into 65.75-66.00). For the week, retain focus at 67/67.50-69.50/70.00 for back-and-forth play.
Have a great week ahead!
Moses Harding
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