30/06/18

RUPEE GAINS, OPEC INCREASES OIL SUPPLY

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 gains 0.26% w/w.

-OPEC agrees to increase output by 1 mbpd.

-US President warns of more tariffs on Chinese products and EU cars.

Important developments during last week: Rupee gained 18 ps w/w (0.26%) to close at 67.83 as against 68.01 last week. Rupee declined to 68.36 and recovered as Govt vowed to maintain fiscal discipline and meet fiscal deficit target. Rupee withstood Crude price pressures and rally in USD against majors. Indian Equity indices swayed within a tight range to end the week marginally higher. Technical indicators point to an intermediate top for USDINR pair at 68.40 and correction to 67.55/67.30 and later to 66.80 is possible. With major negatives known and factored, it is difficult to extrapolate recent Rupee trend into further weakness without a relief for the pair. The pair is impacted by FPI otflows, higher trade deficit and increasing US Yields.                                                                                                                                   

FII’S have sold Rs 4844 Cr of Indian Equities in June till date . FII’S have sold 9290 Cr of Indian debt securities in June till date . On a cumulative basis, FII’S have sold Rupees 1405 Cr of Indian Equities till date for this calendar year and have sold  Rupees 40602 Cr of Indian debt in this calendar year till date.

Global developments: US Q1 growth was finalized at 2.0%, revised down from 2.2% and missed expectation of 2.2%. GDP price index was revised up to 2.2%, from 1.9%.

In its monthly bulletin, ECB noted that “euro area economic expansion remains solid and broad-based across countries and sectors, despite recent weaker than expected data and indicators.” In the June Euro system macroeconomic projections, annual real GDP growth is projected to be at 2.1% in 2018, 1.9% in 2019 and 1.7% in 2020. HICP inflation is projected to be at 1.7% in 2018, 2019 and 2020.

On the global scale, ECB noted, that “following a year of strong and highly synchronized growth, global momentum slowed somewhat in the early part of 2018.” While, growth is expected to rebound in near term, it warned that “the implementation of higher trade tariffs, amid ongoing discussions of further protectionist measures, represents a risk to the global economic outlook.”

Important developments for next week: No major events.

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: 67.50/67.30 on the downside and 68.40 on the upside.                                                                                                                 

Market developments:

-Indian Nifty closed at 10821.

-Gold closed at 1271 and WTI Crude closed the week at USD 69.25.

-Indian 10 Year G-SEC closed the week at 7.82%. US 10 Year Yield closed at 2.90%.   

Data Highlights of last week:

-US new home sales climbed to 689k.

-US House price index climbed 6.6% y/y and consumer confidence dipped to 126.4.

-US durables order declined -0.6% m/m and pending home sales.

-US weekly jobless claims was reported at 227k.

-US personal income rose 0.4% m/m, spending climbed 0.2% m/m, Core PCE index climbed 0.2% m/m and Chicago PMI climbed 64.1. Data were all in line with expectation.

-EU CPI(flash) climbed 2% y/y, in line with consensus.

-EU GDP(final) and German Gfk consumer confidence climbed to 10.7.

-German Ifo survey was in line with consensus at 101.8.

-Japanese unemployment rate declined to 2.2% and industrial production declined -0.2% m/m, housing starts climbed 1.3% y/y.

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 67.75. 50 day moving average is at 67.49. 200 day moving average is at 65.32. Daily MACD is in buy zone, implying bottom at 66.85 . Important support zone is at 67.80 and later at 66.85. Important resistance is at 69.10.

EURO/USD:

GBP/USD:      

USD/YEN:

Strategy for USD/INR: USDINR payables can be covered from cost angle and exports can be covered.                                

Suggested Portfolio: 1) Sell USDINR on rally to 68/68.25 sl 68.45 tgt 67.30.                

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

Currency Map:

Data and Events for upcoming week: US Data: ISM(mfrg and services), construction spending, factory orders, ADP employment report, FOMC minutes, weekly jobless claims, unemployment rate(nonfarm payrolls) EU data: PPI, unemployment rate, retail sales, German factory orders, PMI(mfrg and services) UK: PMI(mfrg, services and construction) Japan:

Global markets continued to be in jitters as there are reports that the U.S. Treasury Department is drafting curbs that would block firms with at least 25 percent Chinese ownership from buying U.S. companies with “industrially significant technology”. In a fresh salvo on Friday, US President warned EU of 20% tariff on EU cars imported into US, if EU does not break entry barriers for US cars.       

The Bank for International Settlements warned in its annual report that escalation of protectionist measures is one possible trigger of global economic slowdown or downturn. It said that “its impact could be very significant, if such escalation was seen as threatening the open multilateral trading system.”          

“Decompression” of historically low bond yields, or “snapback” in core sovereign market yields could be another trigger. And, it could take place “in response to an inflation surprise” and “the perception that central banks will have to tighten more than anticipated. In the US, “the prospective heavy issuance of government debt, combined with the gradual unwinding of central bank purchases, could add to this risk.”

General reversal in risk appetite is a third possible trigger. And, such reversal could reflect a range of factors, including disappointing profits, the drag of the contraction phase of financial cycles where these have turned, a souring of sentiment vis-à-vis EMEs, or untoward political events threatening stability in some large economies. BIS added that from this perspective, “recent events in the euro area are a source of concern.”

US President said the administration is “finishing” the study of tariffs on cars from EU. Trump blamed EU again as “they have long taken advantage of the U.S. in the form of Trade Barriers and Tariffs.” Trump promised “in the end it will all even out – and it won’t take very long!”

Capital outflows, increase in Crude prices and ongoing trade turmoil roiled Rupee sentiment further. Oil prices rose on Wednesday following supply disruptions in Libya and Canada and after US officials told oil importers to stop buying Iranian crude from November. There are reports that US President may refrain from unilateral executive action against China and may strengthen existing laws to protect US intellectual property.