05/10/18

RBI on hold, RUPEE BREACHES 74, INDIAN EQUITY INDICES IN DEEP RED

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 at 74, Equity indices witness steep fall.

-RBI signals patience for Rupee weakness.

-Global yields spike higher.

Important developments during last week: Indian Rupee closed at 73.76 as against prior week close of 72.48. Rupee breached 74 swiftly and spent less than 4 days in the 73-74 zone. RBI’s action of status quo and steep rally in US yields contributed to further Rupee weakness. Rupee decline is on the path of least resistance as RBI sent a strong message that Rupee weakness is not a worry and is appropriate. RBI Governor cited other EM Currency weakness to defend Rupee fall. It was a eventful week both for Equity and FX markets. Equity markets showed sympathy for INR weakness and declined more than 6% w/w. Rich valuations, crackdown on erring banks, IL&FS issue, partial reversal of Oil pricing freedom to OMC companiesand rising Global yields contributed to the fall in Equity indices.     (contd.,)

RBI disappointed market expectation of 25 bps hike. Repo was unchanged at 6.5% with a calibrated tightening bias. Inflation forecast was reduced to 3.8-4.5% zone for second half of this fiscal due to benign food inflation. RBI Governor said that interest rate management is centered on inflation control and not on exchange rate movement. He added that exchange rate movement will be decided by market forces and RBI can intervene to smoothen the movement. This is a clear messsge that RBI is hoping for correction of trade distortion through a fall in Rupee.

Govt announced cut in duty of Petro products by Rs 1.50 and Oil marketing companies will bear Rs 1 burden. Consumers will get a minimum relief of Rs 2.50. Central Govt has requested state govts to offer relief in VAT.

FII’S sold Rs 5395 Cr of Indian Equities in Oct till date . FII’S  sold Rs 1591 Cr of Indian debt securities in Oct till date . On a cumulative basis, FII’S have sold Rupees 15017 Cr of Indian Equities till date for this calendar year and have sold  Rupees 50892 Cr of Indian debt in this calendar year till date.

What to watch: Indian IIP and CPI.

Global developments: US economic data continued to be robust. ISM (mfrg and non mfrg) data showed that all sectors of the economy are vibrant. Fed Chair Powell hailed a “remarkably positive outlook” for the economy. He characterized the combination of steady, low inflation, and very low unemployment as ”extraordinary times” and noted that the U.S. is on the verge of a “historically rare” era.

US jobs data was another testimony to US economic strength as emplyment levels remained elevated. US unemployment rate dropped to 3.7% in September, down from 3.9% and beat expectation of 3.8%. That’s the lowest level in 49 years. However, last month job additions was lower than expected at 134k.

Average hourly earnings grew 0.3% m/m and matched expectations. Strong set of data implies that US Q3 growth will surpass expectations and is expected to be close to 4%.

US and Canada reached trade agreement called USCMA , which will replace the old NAFTA. A new chapter has been added that would require these 3 countries (US, Canada and Mexico) to report on Balance of payments positions and on FX reserves and central bank intervention in spot and fwd markets. This is a new precedent, probably aimed at China.

Important developments for next week: Indian CPI and IIP

Important levels to watch for are: 1) EUR/USD: 1.13 on the downside and 1.1820 on the upside. 2) USD/INR Supports: 72.90 on the downside.

Market developments:

-Indian Nifty closed at 10316.

-Gold closed at 1206 and WTI Crude closed the week at USD 74.30.

-Indian 10 Year G-SEC closed the week at 8.03%. US 10 Year Yield closed at 3.22%.   

Data Highlights of last week:

-US ISM(mfrg) dipped marginally to 59.8, construction spending climbed 0.1% m/m.

-US ISM(non mfrg) climbed to 61.6 and ADP employment report reported 230k job additions in private sector.

-US weekly jobless claims declined to 207k and factory orders climbed 2.3% m/m.     

-US trade balance widened to -53.2 bn in Aug.

-EU PMI(mfrg) was finalized at 53.2, unemployment rate was reported at 8.1% and PPI climbed 0.3% m/m.

-EU PMI(services) was reported at 54.7 and retail sales declined -0.2% m/m.

-UK PMI(services) dipped to 53.9.

-UK PMI(mfrg)            climbed to 53.8 and PMI(construction) declined to 52.1.

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 72.56. 50 day moving average is at 70.71. 200 day moving average is at 67.06. Daily MACD is in buy zone, implying bottom at 68.30 . Important support zone is at 72.90/72.40.

EURO/USD: The pair is below major moving averages. Next Major resistance is at 1.1820 and later at 1.1960. Major support is at 1.13. Daily MACD is in sell zone, implying an important top at 1.1820. Weekly MACD is in sell zone, implying important top at 1.2560.

GBP/USD: Trend is sideways in daily chart. Daily MACD  is in sell zone, implying important top at 1.33 and weekly MACD is  in sell zone, implying important top at 1.4375. The pair is trading below 200 day moving average. Important resistance is at 1.33 and later at 1.3560. Important support is at 1.2925 and later at 1.2785.                       

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 113.20/111.85. Important resistance is at  114.70.   

Suggested Portfolio: 1) Buy USDINR on decline with stop loss at 72.90.                

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:  PPI, CPI and weekly jobless claims, EU data: Industrial production UK: GDP, industrial and manufacturing production  Japan: