01/09/18

RUPEE IN FREE FALL MODE, GDP CLIMBS 8.2%

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 in free fall mode, hits 71.

-Indian Q1 GDP off to rousing start in Q1, Growth rate at 8.2%.

-US President is unrelenting in opposition to Chinese trade talks.

Important developments during last week: Rupee declined 1.56% to end the week at 70.99. RBI’S intervention was sporadic and Govt officials comments were not helpful for Rupee.Higher Oil prices and fear of expanding trade deficit continued to weigh down on Rupee. WT1 Crude has now again touched US 70, up from USD 65, rally of over 8% in the last few days. July trade deficit was at USD 18 bn. Capital flows have tapered off. Trade tensions continued to persist and put pressure on EM currencies.

Indian GDP was off to a rousing start in Q1. It climbed 8.2% in Q1. This is the highest growth rate since 2014-15. Last quarter GDP expanded 7.7%. Mfrg climbed 13.5%, agri sector grew by 5.3%, and services climbed 6.5%. GVA climbed 8%.

Construction activity, has also rebounded strongly, growing 8.7 percent in April-June, from 1.8 percent in the same quarter last year, showing heightened activity in infrastructure, particularly road construction Rupee depreciation and aggregate demand build up are expected to support growth rate. NPA cycle is tapering off due to aggressive provisioning by PSU banks. Credit growth is at 12.9%. Private final consumption expenditure (PFCE), in inflation-adjusted prices — a gauge to measure changes in household spending — grew 8.6 percent in April-June. Government expenditure grew 7.5 percent at constant prices during the quarter-ended June. Gross Fixed Capital Formation (GFCF), a useful metric to measure corporate investment activity, grew 10.0 percent in April-June.

Core sector grew by 6.6% in July. In Apr-July period of 2018, core sector has grown 5.8%.

FII’S have bought Rs 72 Cr of Indian Equities in Aug till 29/8 . FII’S have bought Rs 3801 Cr of Indian debt securities in Aug 29/8 . On a cumulative basis, FII’S have bought Rupees 2101 Cr of Indian Equities till date for this calendar year and have sold  Rupees 37338 Cr of Indian debt in this calendar year till date.

Global developments: Trade issues continued to dominate Global asset market movement last week. Initially, Global markets were lifted by investor optimism that US-Mexico trade deal may help in averting a Global trade war. Canada is expected to join in this agreement soon. However, US President said that trade talks with China may be inappropriate now as long overdue correction in trade imbalance is necessary. However, Global markets were again jittered by Chinese developments and steep decline in Turkish Currency. US President is reported to be considering escalating trade tariff on Chinese imports. He also refused EU offer to drop auto tariffs calling EU trade issues as worse like China.

  EU regretted US President’s rhetoric on tariffs and asked to honor the trade ceasefire agreement. EU official said that “the economic policy of the United States is currently one of the substantial risks to the global economy.” And he warned that unpredictable trade and economic policy, biased rulings in U.S. courts and the dominant role of the Dollar were bad for Europe. He added that there was an increasing interest for Europe “to free oneself from a one-sided dominance.”

ECB chief economist said that the central bank’s monetary policy has been “effective in stabilising the euro area economy and creating conditions for a sustained adjustment of inflation towards below, but close to, 2% over the medium term.” But for now, “patient, prudent and persistent monetary policy is still needed” for the Eurozone right now.”

US data was upbeat. Q2 GDP was revised upwards. Consumer spending climbed 0.2% m/m, in July after adjusting for inflation. Wage growth was strong and PCE index (monitored by Fed for inflation) is in line with Fed target, implying gradual rate hike. Fed is on track to deliver rate hike in Sept.

Important developments for next week: US employment data, US , EU and UK mfrg data.

Important levels to watch for are: 1) EUR/USD: 1.13 on the downside and 1.1775 on the upside. 2) USD/INR Supports: 70.30 on the downside and 71.40 on the upside.

Market developments:

-Indian Nifty closed at 11680.

-Gold closed at 1206 and WTI Crude closed the week at USD 69.90.

-Indian 10 Year G-SEC closed the week at 7.95%. US 10 Year Yield closed at 2.86%.   

Data Highlights of last week:

-US house price index climbed 6.3% y/y and consumer confidence climbed to 133.4.

-US Q2 GDP growth was revised up to 4.2% qoq, from 4.1% qoq. GDP price index was unrevised at 3.0%.

-US Pending home sales declined -0.7% m/m.

-US Personal income climbed 0.3% m/m, spending was up 0.4% m/m, in line with consensus, Core PCE index climbed 0.2% m/m and weekly jobless claims dipped to 213k.

-US Chicago PMI climbed to 63.6.

-German retail sales declined -0.4% m/m. EU CPI was below estimate at 2% y/y. Unempolument rate was at 8.2%.

-German Ifo survey climbed to 103.8.

-Japanese  housing starts declined -0.7% y/y. Unemployment rate was at 2.5%.

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 69.58. 50 day moving average is at 69. 200 day moving average is at 66.22. Daily MACD is in buy zone, implying bottom at 68.30 . Important support zone is at 70.30 and later at 69.52. Important resistance is at 71.40.                                                                                                                                                                     

EURO/USD: The pair is below 100 and 200 day major moving averages. Next Major resistance is at 1.1730 and later at 1.1960. Major support is at 1.13. Daily MACD is in buy zone, implying an important bottom at 1.13. 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 1.2662 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 1.3050 and later at 1.3250. Important support is at 1.2660.

USD/YEN: The pair is above major moving averages. Daily MACD is in buy zone, implying important bottom at 109.70. Next important support is at 109.70. Important resistance is  113. 

Sugested Portfolio: 1) Buy USDINR on decline to 70.30 with stop loss at 70.                

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

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 non mfrg), Factory orders, construction spending, trade balance, ADP employment report, weekly jobless claims and nonfarm payrolls EU data: PMI(mfrg and services), PPI, retail sales, German factory orders and industrial production, GDP UK: PMI(mfrg, services, construction) Japan: Unemployment rate and housing starts.