11/08/18

EURO DECLINES ON FEAR OF BANKING CONTAGION

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:

-Global markets rattled by new US moves on sanctions against Russia and Turkey.

-Indian Equity indices climb to new highs.

-Indian CPI data to be the focus data next week.

Important developments during last week: Indian Rupee closed 22 ps weaker at 68.82. It closed at 68.60 last week. USDINR swung in the 68.45-69 range. RBI ‘s intervention has helped Rupee to remain under 69. RBI has sold USD 20 bn in the last 4 months to check Rupee fall. Rupee’s stability was also aided by fresh FII inflows into Equity and debt markets. Indian Equity indices soared to new highs. In Corporate results, SBI result was a shocker as it reported third straight quarter of loss. SBI reported Rs 4876 Cr loss in Q1. Gross Non performing loans stands at 2.13 lac Crores.

IIP climbed 7% in June as against 3.9% in May.IIP has clocked 5.2% growth in Q 1 against 1.9%, a year earlier.Mfrg climbed 6.9% in June. Mining expanded 6.6%. Capital good rose 9.6% and consumer durables climbed 13.1%. Focus is on CPI data. Indian Q1 GDP is to be released on Aug 31 st. Expect 7.5% upwards for Q1.                                         

FII’S have bought Rs 1469 Cr of Indian Equities in Aug till date . FII’S have bought Rs 5500 Cr of Indian debt securities in Aug till date . On a cumulative basis, FII’S have bought Rupees 3498 Cr of Indian Equities till date for this calendar year and have sold  Rupees 35639 Cr of Indian debt in this calendar year till date.

EM Currencies fall against USD should keep up pressure on Rupee. RBI intervention has to be on bigger scale to keep Rupee under check. Expect USDINR to find support at 68.50 on any decline.

Global developments: Trade developments between US and China and free fall in Turkish Lira and its negative impact reverberated across Global markets. Fear of contagion due to free fall in Turkish lira and exposure of EU banking system to Turkey rattled Global markets. Euro declined 1.35% w/w to 1.14 levels due to EU banks exposure to troubled Turkey and also due to monetary divergence between EU and US. US inflation is rising and is met with interest rate hikes. ECB is falling behind the curve, aiding USD’S rally. US announced doubling of metals tariffs on Turkish imports even as it fired fresh sanction salvo on Russia. According to Bank for International Settlements data, Spanish banks are owed USD 83.3B by Turkish borrowers; French lenders are owed USD 38.4B; and banks in Italy are owed USD 17B. 

GBP/USD has declined 1.70 percent in the last five days. The currency pair is trading at 1.2755 near a one year low after no deal Brexit probabilities rose. 

US Treausries rose, pushing yields lower on safe haven status.

Japanese GDP grew 0.5% qoq, 1.9% annualized in Q2. That’s way stronger than expectation of 0.3% qoq, 1.4% annualized. It’s also a strong rebound from prior quarter’s -0.2% qoq, -0.6% annualized contraction.

UK GDP grew 0.4% qoq in Q2, doubled that of Q1’s 0.2% qoq and met expectations. Year-over-year, GDP grew 1.3% yoy in Q2, also matched expectation.                           

US announced 25% tariff on USD 16 bn worth of Chinese imports from Aug 23 rd and China announced retaliatory measures of equal proportion.

In ECB’s Monthly Economic Bulletin, the central bank noted that latest economic indicators suggest “ongoing solid growth”. But at the same time, downside risks to global economy “have intensified. That was due to “actions and threats regarding trade tariff increases by the United States and possible retaliation by the affected countries.” Also, global trade indicators recorded a “loss in momentum.

PBOC imposed 20% reserve requirement ratio (RRR) on onshore (CNY) FX forward transactions. This is to prevent further Yuan sell off.

Important developments for next week: Indian CPI and Turkish developments.

Important levels to watch for are: 1) EUR/USD: 1.13 on the downside and 1.1510/1.1620 on the upside. 2) USD/INR Supports: 68.30 on the downside and 69.10 on the upside.

Market developments:

-Indian Nifty closed at 11429.

-Gold closed at 1219 and WTI Crude closed the week at USD 67.78.

-Indian 10 Year G-SEC closed the week at 7.75%. US 10 Year Yield closed at 2.86%.   

Data Highlights of last week:

-US Core PPI climbed 0.1% m/m and weekly jobless claims declined to 213k.

-US CPI climbed 0.2% m/m.

-EU sentix investor confidence climbed to 14.7.

-German industrial production declined -0.9% m/m.

-UK GDP climbed 0.4% q/q, industrial and manufacturing production climbed 0.4% m/m respectively.                                                                                                                   

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 68.70. 50 day moving average is at 68.35. 200 day moving average is at 65.90. Daily MACD is in sell zone, implying top at 69.10 . Important support zone is at 68.30 and later at 67.70. Important resistance is at 69.10.

EURO/USD: The pair is below 100 and 200 day major moving averages. Next Major resistance is at 1.1510 and later at 1.1620. Major support is at 1.13. Daily MACD is in sell zone, implying an important top at 1.1850. Weekly MACD is in sell zone, implying important top at 1.2560.

GBP/USD: Trend is bearish in daily chart. Daily MACD  is in sell zone, implying important top at 1.3215 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 1.2957 and later at 1.3050. Important support is at 1.26.

USD/YEN: The pair is above major moving averages. Daily MACD is in sell zone, implying important top at 113. Next important support is at 110.20 and later at 109.70. Important resistance is  113.      

Strategy for USD/INR: USDINR payables can be covered from cost angle and exports can be covered till 69.10 is not broken.                                

Suggested Portfolio: 1) Buy USDINR on decline to 68.50 with stop loss at 68.25.                

   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: Retail sales, Industrial production, NY mfrg index, building permits, housing starts and weekly jobless claims EU data: Zew survey, GDP, CPI and industrial production UK: Unemployment rate, CPI, RPI, PPI, retail sales Japan: