FX – WEEKLY REPORT

16/06/18

RUPEE VOLATILITY CONTINUES, CPI CLIMBS, FED HIKES RATES, ECB DISAPPOINTS EXPECTATIONS

Highlights:

-GLOBAL and INDIAN MARKET DEVELOPMENTS

-DATA HIGHLIGHTS AND FX MARKET DEVELOPMENTS

-TECHNICALS

-STRATEGY FOR HEDGING AND SUGGESTED PORTFOLIO

-DATA AND EVENTS FOR NEXT WEEK.

Major economic events:

-Rupee volatility extends, CPI climbs, Trade deficit soars.

-Fed hikes rates, bullish on growth and sends hawkish message.

-ECB announces end of QE by Dec, assures low rates for one more year.

-US- China trade war intensifies.

Important developments during last week: Rupee declined 51 ps w/w (0.75%) to close at 68.01 as against 67.50 last week. Rupee decline could be attributed to higher trade and Current account deficit and strength in USD against majors. Indian exports grew at 20.18% in May to USD 28.8 bn, highest growth rate in 6 months. Imports climbed 15% to USD 43.42 bn. Trade deficit expanded to USD 14.62 bn. Oil imports climbed to USD 11.5 bn. Indian Current account deficit widened to 1.9% of GDP in Q4 of last fiscal to USD 13 bn. This is against USD 2.4 bn in Q4 of prior fiscal. Imports grew at 15.7%, while exports climbed 6.3% in Q4. Merchandise trade deficit in Q 4 (2017-18) climbed to 41.6 bn (5.9% of GDP) from USD 30 bn in previous fiscal.                                                                                            

 

Capital inflows was enough to offset CAD. Inflows surged to USD 24.6 bn (3.5% of GDP) from USD 10.4 bn in prior fiscal. FX reserves accretion was a healthy USD 13 bn in Q4. FDI inflows was apprx USD 7.4 bn. FPI inflows dented due to outflow from debt markets. NRI inflows, trade credits and account receivables offset debt outflows. Invisibles grew by 5.2% to USD 28.6 bn. This is the lowest growth in a decade. Domestic savings also declined to 29% of GDP in Q4 and averaged 28.8% in last fiscal, also the lowest in a decade.

Indian CPI climbed 4.87% in May, highest in 4 months. Food inflation climbed 3.1%. Core inflation rose to 45 months high of 6.17%. RBI targets a median level of 4% inflation. RBI raised rates by 25 bps last week. IIP also climbed 4.9% Mfrg output grew 5.2%. Mining, Capital goods also fared well due to base effect.

FII’S have sold Rs 315 Cr of Indian Equities in June till date . FII’S have sold 4753 Cr of Indian debt securities in June till date . On a cumulative basis, FII’S have bought Rupees 3122 Cr of Indian Equities till date for this calendar year and have sold  Rupees 36066 Cr of Indian debt in this calendar year till date.

Rupee is clearly at the mercy of Crude prices and US Yields. With Crude prices showing signs of early weakness, pressure on Rupee could get mitigated. However, rising US Yields pose problems as investors would prefer safer returns in US than possible higher returns in an uncertain environment. RBI may have to increase interest rates even more to match US Yield curve or let Rupee decline. If Global crude prices fall further, RBI may let Rupee weakness to happen, if it is line with global Currency developments. Hence, it will be wiser to hedge USD exports on rally and cover imports on any significant decline targeting 67.30/66.85 levels in coming weeks.

 

Global developments: USD gained last week, helped by Fed’s guidance and ECB’S disappointment. Fed’s forward projections imply two more rate hikes this year. On the contrary, ECB wavered to end QE early and indicate early rate hikes. ECB downgraded growth and pledged lower rates till summer of 2019. Crude Oil fell ahead of next week OPEC meeting. Markets shrugged off US trade war with China.US President imposed 25% tariff on Chinese products worth USD 50 bn. China has retaliated in equal strength and has vowed to deal the issue through WTO. Reactions in asset and Currency markets indicate that investors were not too worried over trade war as yet and were less enthused by US President’s talks with North Korean leader and its outcome. Markets are more focussed on economic data and trajectory of interest rates.

FOMC raised rates by 25 bps to 1.75%. Fed is upbeat on the economic developments since the last meeting, noting “solid” growth, compared with “moderate” growth in the prior meeting. The staff upgraded the GDP growth forecast for this year and inflation outlook for this year and 2019. Fed noted that “further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective over the medium term”. Fed statement implies two more rate hikes.

Policymakers project the federal funds rate target to increase to 2.4% (from 2.1%) this year and to 3.1% (from 2.9%) in 2019, suggesting that the median expectation is for two more rate hikes this year. 

ECB announced that it is ending asset puchase program this Year, but maintained that rates will remain low till mid 2019. Growth projections was revised lower. Asset purchasing tapering will begin in Sept and end completely in Dec.     ECB projects annual GDP growth to be at 2.1% in 2018, that’s notable downward revision from March projection of 2.4%. For 2019 and 2020, GDP projections were kept unchanged at 1.9% and 1.7% respectively. On the other hand, HICP inflation is projected to be 1.7% in 2018, 2019 and 2020. That’s notably revised up from March projection of 1.4% in 2018, 1.4% in 2019 and 1.7% in 2020.

US and North Korean leaders signed agreement for denuclearization of Korean Peninsula.

                                                                                                                                   

Important developments for next week: BOE meeting

Important levels to watch for are: 1) EUR/USD: 1.15 on the downside and 1.1850/1.1960 on the upside. 2) USD/INR Supports: 67.30 on the downside and 68.40 on the upside.

Market developments:

-Indian Nifty closed at 10817.

-Gold closed at 1282 and WTI Crude closed the week at USD 64.30.

-Indian 10 Year G-SEC closed the week at 7.89%. US 10 Year Yield closed at 2.92%.   

Data Highlights of last week:

– US CPI climbed 0.2% m/m.

 

-US PPI climbed 0.5% m/m.

 

-US Weekly jobless claims declined to 218k and Core retail sales climbed 0.9% m/m.

-US industrial production declined -0.1% m/m, Ny mfrg index climbed to 25 and TIC puchases was higher at USD 93.5 bn.

-EU CPI climbed 1.9% y/y.

-EU industrial production declined -0.9% m/m and employment change was reported at 0.4% q/q.

 

-German Zew survey climbed to -16.1 and EU Zew survey declined to -12.6.

 

-UK unemployment rate was reported at 4.2% and claimant count change was at -7.7k.

 

– UK industrial production declined -0.8% m/m and manufacturing production declined -1.4% m/m.

-UK CPI climbed 2.4% y/y, RPI climbed 3.3% y/y and PPI(output) climbed 0.4% m/m.

 

-UK retail sales climbed 1.3% m/m.

 

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 67.59. 50 day moving average is at 66.83. 200 day moving average is at 65.10. Daily MACD is in buy zone, implying bottom at 66.85 . Important support zone is at 66.85. Important resistance is at 68.40.

EURO/USD: The pair is below all major moving averages. Next Major resistance is at 1.1850 and later at 1.1960. Major support is at 1.1508. Daily MACD is in buy zone, implying an important bottom at 1.1508. Weekly MACD is in sell zone, implying important top at 1.2560.

GBP/USD: Trend is bearish in daily chart. Daily MACD  is in buy zone, implying important bottom at 1.3205 and weekly MACD is  in sell zone, implying important top at 1.4375. The pair is trading below all major moving averages. Important resistance is at 1.3475 and later at 1.3550. Important support is at 1.3205 and later at 1.3050.          

USD/YEN: The pair is above major moving averages. Daily MACD is in buy zone, implying important bottom at 108.10. Important support is at 108.10. Important resistance is  111.40 and later at 113.75.                                  

                       

Strategy for USD/INR: USDINR payables can be covered from cost angle and exports can be covered on rally due to extended rally.

Suggested Portfolio: 1) Sell USDINR on rally to 68.25/68.40 sl 68.90 tgt 66.85.                

Hedging suggestion: Considering the volatility in the markets, suggest hedging of Currency exposures be done from costing/affordability angle.

Currency Map:

Currency Pairs WEEKLY CLOSE PRIOR WEEK CLOSE % change
EURO/USD 1.1610 1.1770 -1.35
GBP/USD 1.3277 1.3407 -0.96
USD/JPY 110.66 109.55 0.95
USD/INR 68.01 67.50 0.75

Data and Events for upcoming week: US Data: Housing data, Phily Fed mfrg index, leading index and weekly jobless claims,  EU data: PMI(mfrg and services), consumer confidence UK: BOE meeting Japan:

                                                                                                                                  

 

 

 

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