MONTHLY SYNOPISIS: June 2020

Currency Map:

WT1 Crude: USD 39.80vs 35.35 in MAY 2020, Brent Crude at 41.72 vs 37.75 in MAY 2020.

Nifty: 10302, up 7.53% m/m. Gold closed at USD 1781.

Indian 10 Year G-SEC yield closed at 5.88% .

Rupee traded in the 75.02-76.30 range in June. The pair closed at 75.51, registering a nominal gain of 10ps for Rupee.  EURINR closed at 84.77, up 1.02% m/m, while GBP declined 0.28% m/m. Yen closed flat against Rupee.

Rupee’s trading range between 75 and 76 was finally broken on 2 nd July. Rupee has been holding on to the 75-76 range due to hefty USD buying by RBI. FX reserves swelled to USD 506 bn as on June end. Rupee gained to 74.60 on 3 rd July due to inflows related to Reliance Industries. RIL has raised close to USD 20 bn. Intel joined the investment (USD 285 mn).

In an expected development, Indian Current account turned surplus in Q4 of 2019/20.  CAD stood at 0.1% of GDP as against -0.7% during the same period in 2018-19. Q3 Current account deficit was reported at 2.6 bn USD (0.4% of GDP). For the full financial year 2019-29, CAD stood at 0.9% of GDP as against 2.1% in 2018-19. Trade deficit in Q4 was at USD 35 bn. BOP surplus was at USD 18.8 bn. This is the first time since 2007, CAD has turned positive.

Indian Equity indices soared 7.5% m/m and the rally is extending in the first week of July. Vaccine hopes and liquidity are the recent triggers for the rally. With lock down restrictions easing, high frequency indictors are indicating a rebound in the economy. Rural demand is better than urban consumption. Mahindra reported 12% jump in Tractor sales in June. Telecom, Food, Pharma, IT, FMCG and rural oriented industries may have weathered the corona shock.                                                                                                         

Govt is accelerating vaccine development and that is the hope against the rising infection curve in India and elsewhere globally. Globally, markets are supported by rebound in manufacturing. However, rising infections and tensions with China are checking market enthusiasm.

India banned Chinese apps and cancelled 4G upgradation tenders to stall Chinese bidding. Power and Highways Ministers have made it clear that Chinese imports and participation will be banned.

Moody’s downgraded Indian sovereign rating to Baa3, one notch above junk grade and the outlook was maintained as negative. Slow down in growth and increase in debt/GDP were cited as reasons for the downgrade.

Focus will be on US/India-China tensions and Corona infections vs vaccine hopes.

Technically, Rupee is bullish now as it has broken 50 day moving average. It is still trading above 200 day moving average. USDINR movement is still at the mercy of RBI. If RBI does not intervene, there is high probability of Rupee testing 73.50. USDINR pair will face resistance at 75.50.Important levels are 74.40/74.10/ 73.50 on the downside and 75/75.25/75.50 on the upside.

Macro-economic developments in June 2020:Indian Core sector declined 23.4% in May, better than 37% decline in April.

Global developments:Global economic data in June beat estimates. US retail sales, ISM (mfrg), employment data and EU PMI(mfrg), Ifo surveys were all better than expected, rasing hopes of quick economic rebound.US non-farm payroll employment grew 4800k in June, well above expectation of 3000k. But it’s still -14.7m, or -0.6%, below the February level. May’s figure was revised up to 2699k.However rising corona infections in US and tensions with China are balancing the rebound optimism. Fed continues to support US economy through various monetary tools.

Fed officials at their policy meeting in June said U.S. gross domestic product is expected to decline 6.5% this year. They also flagged the need to keep the key interest rate near zero through at least 2022.Fedannounced tweaks to its bond buying program, widening the range of eligible assets to include all U.S. corporate bonds that satisfied certain criteria.

IMF expects global output to shrink 4.9% this year, much sharper than the 3% contraction predicted in April.

EU and UK PMI(mfrg) sowed optimism for Q3 growth. France and Australian mfrg entered into expansion mode.Eurozone’s Q1 GDP contraction was revised up to -3.6% qoq, up from initial estimate of -3.8% qoq. That was still the sharpest decline on record since 1995. For EU, GDP contracted -3.2% qoq, also the worst since 1995. 

ECB announced an increase of €600 billion to its Pandemic Emergency Purchase Program (PEPP), and it now reaches €1.35 trillion. That has exceeded most economists’ expectations. In addition, the bank said it will reinvest proceeds from this program – maintaining a large balance sheet and similar to previous schemes.German Chancellor Angela Merkel announced a €130 billion stimulus plan.

Japanese GDP contraction was finalized at -0.6% qoq in Q1, better than earlier estimate of -0.9% qoq, marginally missed expectation of -0.5% qoq. In annualized term, GDP contracted -2.2%, revised up from -3.4%. 

Currency outlook: Expect USDINR to trade in the 74.10-75.50 range.

EUR/INR is expected to trade in the 83-85. GBPINR is expected to find support at 92 and possibly trade upto 95.50 levels.JPYINR could consolidate in the 69-71 range.

Outlook for JUNE 2020:

Suggestion: USD imports be hedged at 74.40/74.10/73.50. Exports can be hedged closer to 75.50. EURINR exports can be hedged closer to 85. EURINR imports be covered on decline to 83. GBP exports can be hedged closer to 95+ levels.

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