MONTHLY SYNOPISIS: OCT 2020

Currency Map:

WT1 Crude: USD 35.80vs 40.22 in SEP 2020, Brent Crude at 37.89 vs 41.69 in SEP 2020.

Nifty: 11642, UP 3.5% m/m. Gold closed at USD 1878.

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

Rupee traded in the 73.03-74.17 range in Oct. The pair closed at 74.11, registering a decline of 0.46% for Rupee.  EURINR closed at 86.94, up 0.50% m/m, while GBP climbed 1.04% m/m. Yen gained 2.10% against Rupee.

Rupee declined to 74.11 on the last working day after a two way movement between 73.05 and 73.95 last month. PSU banks bought USD at every level to stem Rupee gains. RBI continued to increase its FX reserves. FX reserves stood at USD 555 bn as on 16 th Oct 2020.

Rupee is in the cusp of a new wave of weakness. Expect swift movement to 74.90/75.30 levels with 73.75/73.55 supports on the downside. Expect Rupee to weaken for a close above 74.75 by Nov end. However, US election results is a risk to this view.

FII’S nett bought Rs 19806 Cr ofIndian Equities in Oct . FII’S nett bought Rs 2815 Cr of Indian debt securities in Sept . In this financial year, FII’S have nett bought Rs 99289 Cr of Equities and have sold Rs  25733 Cr in debt. In FY 19-20, FII’s have sold Rs 10200 Cr of Equities and 47393 cr of debt.

Indian Current account is estimated to be in surplus this Year. It is expected to be between 0.3% to 1% of GDP. With Capital inflows strong, BOP surplus could expand to USD 100 bn this year.Indian trade deficit was reported at USD 2.91 bn in Sept vs USD 6.8 bn in Aug. Importscontracted 19.60% in September to $30.31 billion from a year ago while exports rose 5.27% to $27.40 billion.Importsfell by 40.06% to $148.69 billion during April-Sept while exports contracted 21.43% y/y to USD 125.06 bn

Indian manufacturing sector has picked pace and many companies have sorted out supply side issues. Production is close to pre pandemic levels. Indian auto sales and tractors picked up in Sept and seems to have beaten last year Festive season sales.

E commerce companies and durable show rooms have reported brisk sales in Oct. High frequency indicators suggest that the economy gained traction. PMI(mfrg) grew at the highest pace since 2018. With service PMI in small contraction, PMI(composite) is robust at 54.6.Indian IIP contracted 8% in Aug and retail inflation was higher at 7.34% in Sept. Food inflation was higher at 10.68%. Aug inflation was at 6.68%.Mfrg sector contracted 8.6, mining contracted 9.8% in Aug.

RBI maintained status quo on rates and stance. RBI Governor said that MPC has decided to see through the inflation as it is likely to be transient.  GDP is expected to contract by -9.5% for this year. GDP is expected to be in positive zone in Q4. RBI Governor said that consumption and exports are picking up and it is not imprudent to dream. He added that the economy is in a decisive stage.RBI pumped Rs 20000 Cr liquidity last week by buying state govt bonds.

IMF projects -10% GDP contraction for this fiscal. GDP is expected to rebound 8.8% next year.

Indian Equity indices climbed steeply in mid Oct and also fell steeply in the last few days, tracking Global sell off in riskier assets. G-SEC yield was brought down by RBI’S bond puchase program.

Technically, Rupee is bearish now as it has broken 74 levels. USDINR movement is still at the mercy of RBI. USDINR has supports at 73.75/73.65 levels on the downside and resistances at 74.40/74.90 and 75.30.

Global developments:USD gained against majors . EUR/USD moved closer 1.16. It is close to breaking 3 months low.Crude Oil also declined steeply to USD 36.  Gold declined to USD 1865.

Global focus was on 1) Corona’s second wave in Europe, 2) US Stimulus pacakge, 3) US Presidential election, 4) Fed’s minutes, 5) Economic indicators.

Oct month closed on a gloomy note for riskier assets, Gold, Oil and Crosses. Even as economies started to revive, next wave of corona infection has hit Europe severly, forcing renewed partial lock down in France, Germany and UK. This is expected to hit Nov data severly. US election is approaching and markets are pricing Biden victory. However, lack of new stimulus measures and climbing infections have soured economic and market gains.

ECB President Christine Lagarde said Europe’s recovery is ” incomplete, uncertain, uneven.” Policymakers now “fear that “the containment measures that have to be taken by authorities will have an impact on this recovery”. ECB has announced to leave all its monetary policy measures unchanged. The deposit rate stays at -0.5%, while the main refi rate and the marginal lending rate also remain unchanged at 0% and 0.25% respectively. The PEPP program will continue to run with a total envelope of 1.35 trillion euro. The members were concerned about the economic outlook and signaled that more stimulus measures will come out in December. ECBPresident Christine Lagarde raised concerns about the negative impacts of renewed lockdown measures by Germany and France (and many more to come) on economic recovery. 

Fed minutes noted that “many participants noted that their economic outlook assumed additional fiscal support and that if future fiscal support was significantly smaller or arrived significantly later than they expected, the pace of the recovery could be slower than anticipated.”

US GDP grew at annual rate of 33.1% in Q3, above expectation of 32.0%.Eurozone GDP grew 12.7% qoq in Q3, well above expectation of 9.0% yoy. That’s also more than enough to cover the -11.8% qoq contraction in Q2. Germany GDP grew 8.2% qoq in Q3, above expectation of 7.3% qoq. But that’s not enough to recovery the -9.7% qoq contraction in Q2.

Currency outlook: Expect USDINR to trade in the 73.50-75.30 range.

EUR/INR is expected to trade between 85.50-87.50. Downside break of 85.50 could pull the pair lower to 84.GBPINR is expected to find support at 93/91 and possibly resisted at 97 levels. Either side break out will decide the new trend. JPYINR could consolidate in the 68-71 range.

Outlook for NOV 2020:

Suggestion: USD imports be hedged at 73.75. Exports can be hedged later or on spike to 74.90/75.30.EURINR imports can be hedged closer to 85.50. GBP exports can be hedged closer to 97+ levels.

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