WEEKLY SYNOPSIS: 22/07/2022

Currency Map:

Brent Crude closed at USD 103.60 VS prior week close of USD 101. Gold closed at USD 1725.Nifty closed at 16719  vs prior week close of 16049. 10 Year G-SEC Yield closed at 7.46%.

Major developments: USDINR traded in the 79.79-80.07 range last week and closed at 79.85 as against prior week close of 79.87. Rupee closed flat w/w. EUR climbed 0.53% w/w and GBP climbed 1.25% w/w against Rupee. Indian benchmark Equity index rallied steeply by 4.17% w/w. 10 Year G-SEC Yield closed at 7.46%. 1-year fwd premia is at 3.17% p.a.

Rupee weakness to 80.06 was met with persistent RBI selling. FPI outflows tapered with sporadic buying on some days. There were no major economic data releases. Govt slashed Windfall tax on crude production to 17000/tonne from Rs 23,250. Export duty on Petrol is scrapped and duty on diesel and ATF is slashed by Rs 2/. Special additional excise duty levied on exports from SEZ zone is exempted.

RBI meeting is scheduled for Aug 3 rd-5 th. RBI is expected to hike rates by atleast 50 bps.

In July till date FII’S have net bought Rs 1360 Cr of Equities in Cash segment and have bought Rs 977 Cr of debt till date. In this Calendar Year, FII’S have sold close to Rs 2 lac Cr worth of Equities. In 2021-22, FII’S net sold Rs 128897 cr in Equity segment and have net bought Rs 4805 cr of debt. In 2020-21 financial Year, FII’S nett bought Rs 2,74,203 Cr of Equities and have sold Rs  42820 Cr in debt.

USDINR has supports at 79.77 and later at 79.35/79.10. Resistance is expected near 80.06/80.25. Rupee movement will depend on Crude price and USD movement against majors.

Global developments: Crosses recovered against USD, helped by ECB’S rate decision of 50 bps hike. ECB raised interest rate by 50bps, and front-loads the exit from negative deposit rate. The central bank also maintains tightening bias. The “larger first step” in policy normalization was based on the “updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy.” The “frontloading” of exit from negative deposit rate ” allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions.” Future policy path will continue to be “data-dependent”. At the post meeting press conference, President Christine Lagarde said that inflation continues to be “undesirably high” and is expected to remain above target for some time. While latest data indicate a slowdown in growth, this slowdown is “being cushioned by a number of supportive factors”.

European PMI data shows that the bloc is soon stepping into recession as mfrg contracted and recorded steep decline after 17 months. UK data also pints to a crawling economic growth with rate hikes hastening the process of recession.

Eurozone PMI Manufacturing dropped from 52.1 to 49.6 in July, below expectation of 51.0. That’s the lowest level in 25 months. PMI Services dropped from 53.0 to 50.6, below expectation of 52.0. That’s the lowest level in 15 months. PMI Composite Output dropped from 52.0 to 49.4, a 17-month low.

Chief Business Economist at S&P Global Market Intelligence said: “The eurozone economy looks set to contract in the third quarter as business activity slipped into decline in July and forward-looking indicators hint at worse to come in the months ahead…“Excluding pandemic lockdown months, July’s contraction is the first signalled by the PMI since June 2013, indicative of the economy contracting at a 0.1% quarterly rate. Although only modest at present, a steep loss of new orders, falling backlogs of work and gloomier business expectations all point to the rate of decline gathering further momentum as the summer progresses…

“With the ECB raising interest rates at a time when the demand environment is one that would normally see policy being loosened, higher borrowing costs will inevitably add to recession risks.”

Focus shifts to Fed meeting and US data on spending and Core PCE index. Fed is likely to raise rates by 75 bps. Forward guidance is of keen interest to plot the path of future Fed rates.

US earnings season kicks into full swing with Google, Microsoft and Apple releasing results in coming week. Also, US Q2 GDP and consumer confidence data will reveal more insights into the economy.

Currency technical levels: USDINR: 80.06/80.25 (Resistance), 79.77/79.35 (Supports), EURINR: 82.20(Resistance), 80.90/79.50 (Support), GBPINR: 94.90 (Support)/ 96.75 (Resistance). JPYINR: 57-60 range.

Hedging advise: USDINR Imports be hedged till 79.35 is not broken. Exports can be hedged at 80+. EURINR receivables be hedged on spike to 82, GBP Exports be hedged at 96+.

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