WEEKLY SYNOPSIS: 30/11/2022

Currency Map:

Brent Crude closed at USD 87.25 VS prior month close of USD 94.80. Gold closed at USD 1773. Nifty closed at 18758 vs Oct close of 18012. 10 Year G-SEC Yield closed at 7.28%.

Major developments: USDINR traded in the 80.51-82.92 range in Nov and closed at 81.42 gain of 1.64% for Rupee as against Oct close of 82.78. EUR climbed 2.50% m/m and GBP climbed 2.32% m/m against Rupee. Indian benchmark Equity index climbed 4.14% m/m. 10 Year G-SEC Yield closed at 7.28%. 1-year fwd premia is at 1.95% p.a.

Rupee climbed 1.64% after 7 months of consecutive fall. FII’S inflow, decline in Oil prices and expected moderation of rate hikes by Fed contributed to Rupee gains. FX reserves fall stabilized and has again shown accretion as RBI mopped up USD to shore up reserves. FX reserves declined from USD 650 bn to USD 527 bn in this calendar year, This is partly attributed to valuation decline in Gold, Cross Currency holdings and US Treasury securities.

The significant impact of rate differentials was evident in Fwd curve with 1year annualized premia dipping to 1.95% p.a.

On the macro front, inflation is still above RBI’S comfort level. Oct CPI was at 6.77%. RBI is expected to rate hikes in Dec meeting and may pause early next year to assess economic impact. Trade deficit continued to soar and net deficit played an important part in reducing Q2 GDP growth. Indian exports declined 16.65% in Oct to USD 29.78 bn. Imports climbed 5.7% to USD 56.7 bn. Trade deficit was at 26.92 bn in Oct. This is the first month of export contraction since Feb 2021.Commerce Secretary said the October trade data was impacted by the Diwali and Dussehra festive season as factory workers tend to go on leave. WTO has reduced global trade growth forecasts and the IMF has downgraded GDP growth projections.

Indian Q2 GDP slowed to 6.3% as against 8.4% growth in Q2 of 2020-21. GVA at basic process climbed 5.6%. In Q1, GDP climbed 13.5%. Agri sector climbed 4.6%, manufacturing contracted 4.3%, services grew by 14.7%, mining declined 2.8%. Construction grew by 6.6%. Govt spending climbed 6.5%. Chief economic advisor said that” In 2022-23, the economy is on track to reach a 6.8-7 per cent growth in the current fiscal,” he said, adding festival sales, PMI, bank credit growth and auto sales data shows that the economy has maintained momentum despite global headwinds.

Core sector growth slumped to 0.1% in Oct as against 7.8% in Sept. Auto sales was robust. Total passenger car sales rose 22.6% at Maruti Suzuki India, 56.2% at Mahindra & Mahindra and 55% at Tata Motors. Sales of utility vehicles, one of the fastest growing segments, rose 32.5% at Maruti and 56% at Mahindra. Tractor sales was up 10.3%. However, two wheeler sales was tepid. Auto sales growth may decelerate in coming months as festive demand tapers off. PMI(mfrg) climbed to 3 month high of 55.7 in Nov. November PMI data pointed to an improvement in overall operating conditions for the 17th straight month. Nov GST grew 11% y/y to 1,45,867 Cr.

Important events to watch: Nov CPI, RBI rate decision and Nov trade data.

USDINR’s resistance is at 81.95/82.25/82.65. Support is at 80.50.

Global developments: Euro has entered into bull mode with clear break of 1.0470, key 200 day moving average resistance. USD index is also below 200 day average of 105.50. These moves signal further downside for USD. Another notable development is the steep decline in Crude prices as demand concerns and Chinese Covid lockdowns outbalanced OPEC decision to reduce supplies. EU and US are discussing measures to cap Crude prices w.e.f from Dec 5 th.

US 10 year Treasury yield declined to 3.55% down almost 80 bps from its Sept high of 4.35%.  2 year yield is at 4.23%, much above long term yield. This inversion of yield curve implies possible recession. However, contrasting signals are emerging from US Equity indices. Dow Jones average is in bull territory as it is now 20% above its Sept low.

Market developments could be attributed to expectation that Fed would slow down rate hikes from Dec. This was confirmed by US Fed Chairman. He said that the pace of rate hikes is likely to slow, but the peak level of rates will be higher than previously expected as there is a long way to go to curb above-trend inflation. He added that the Fed’s monetary policy was approaching “the level of restraint that will be sufficient to bring inflation down.” Fed Chief said that labor costs will be a key driver to inflation and hence needs comprehensive analysis. Fed Chief was confident that rate hikes will not tip the market into recession.

The Fed’s main worry though this cycle has been that higher inflation combined with an extremely tight labor market would lead to a wage-price spiral. Though job openings are more than job seekers, wage price increase has not materialised to the extent feared. Higher inflation should reduce consumers purchasing power, leading to demand decline and hence abatement of price pressures. Higher rates may feed into the market next year and help inflation to dampen and hold Fed’s hand from further rate hikes. As economy soft lands with inflation cooling off partly due to base effect, Fed could assess and roll back part of rate hikes in 2024.

US economic activity is giving mixed signals. US ISM (mfrg) slipped below 50, indicating contraction mode. US Q3 GDP growth was revised up to 2.9% annualized, price index revised up to 4.3%. Goods trade deficit widened to USD -99.0B. US retail sales rose 1.3% mom to USD 694.5B in October, above expectation of 0.9% mom. Ex-auto sales rose 1.3% mom, above expectation of 0.4% mom to USD 565.1B. ADP employment report shows that Fed tightening is having an impact on job creation and pay gains. Focus now shifts to US non farm payrolls data set for release on Friday.

EU and UK economic data indicate recession in the offing. PMI(mfrg and services) remain in contraction mode. However, inflation is still way above mandated levels. ECB member said that ECB has to raise rates by 50 bps and even possibly by 75 bps in Dec meeting to dampen inflation expectations. ECB will also be discussing shrinking the assets purchased with the stimulus program, also known as quantitative tightening. 

Pound recovered from Sept low of 1.0350 levels to 1.20, partly aided by new finance bill provisions.

Yen recovered from 150 to 137 levels, tracking fall in US Treasury Yields.

Currency technical levels: USDINR: 80.50 (Supports), 81.95/82.20/82.50 (resistance), EURINR: 86.35(Resistance), 83.75/82 (Support), GBPINR:  97.50/95(Support)/ 102 (Resistance). JPYINR: 61.30 (resistance) /58.45/56.50 (support).

Hedging advise: USDINR Imports can be hedged on decline to 80.50/79.80, Exports can be hedged on rally to 81.60. EURINR payables be hedged and exports be hedged closer to 86.35.  GBP Exports be hedged on rally to 102.

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