WEEKLY SYNOPSIS: 26/08/2022

Currency Map:

Brent Crude closed at USD 100 VS prior week close of USD 96. Gold closed at USD 1750.Nifty closed at 17558 vs prior week close of 17758. 10 Year G-SEC Yield closed at 7.22%.

Major developments: USDINR traded in the 79.70-79.94 range last week and closed at 79.87 as against prior week close of 79.78. Rupee was steady within a small range. EUR declined 0.99% w/w and GBP declined 0.68% w/w against Rupee. Indian benchmark Equity index  declined 1.12% w/w. 10 Year G-SEC Yield closed at 7.22%. 1-year fwd premia is at 3.03% p.a. FX reserves stands at USD 564 bn as on Aug 26 th. FX reserves declined by USD 6 bn as compared to Aug 12 th data.

Rupee showed weakening tendency tracking USD index’s gain. Equity indices could not climb above key technical trendline resistance zone.. 10 year G-SEC stabilised. There were no major economic releases last week. Apr-June GDP quarter GDP data is set for release on 30/08.

In Aug till date FII’S have net bought Rs 47437 Cr of Equities in Cash segment and have sold Rs 4895 Cr of debt till date. In this Calendar Year, FII’S have sold close to Rs 1.49 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’s resistance is at 79.94/80.06. Upside break of 79.94 could weaken Rupee past 80.06 levels.

Global developments: The week culminated with Fed Chairman’s strong message and commitment to fight inflation.

Fed Chairman’s sharp and focused speech at Jackson Hole symposium brought back risk aversion and prompted new wave of USD bullishness. Stocks sold off heavily, fearing that Fed has no interest pivot and will use interest rate as a tool to achieve their inflation goal.

Fed Chairman said that “Reducing inflation is likely to require a sustained period of below-trend growth. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation,” he said, adding, “but a failure to restore price stability would mean far greater pain.” Additionally, Powell emphasized, “the historical record cautions strongly against prematurely loosening policy. We must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay.”

PCE price index rose 6.3% yoy, slowed from 6.8% yoy. PCE core, excluding food and energy, rose 4.6% yoy, slowed from 4.8% yoy.

Based on the second estimate, US GDP contracted at -0.6% annualized rate in Q2, comparing to first estimate of -0.9%,

US Treasury bond was relatively quiet with 10 Year trading at 3.03%. USD index maintains its bullishness.

US PMI Composite output dropped from 47.7 to 45.0, a 27-month low. Senior Economist at S&P Global Market Intelligence said:“ August flash PMI data signalled further disconcerting signs for the health of the US private sector. Demand conditions were dampened again, sparked by the impact of interest rate hikes and strong inflationary pressures on customer spending, which weighed on activity. “One area of reprieve for firms came in the form of a further softening in inflationary pressures. Input prices and output charges rose at the slowest rates for a year-and-a-half amid reports that some key component costs had fallen. 

Euro’s downtrend below parity is sustaining as EU economy is clouded by energy crunch, trade exposure to China, and high inflation.

Bundesbank said in its monthly report that the Germany will be adversely affected by the unfavourable developments on the gas market in the summer quarter and beyond. Also, the likelihood of GDP falling in the coming winter half-year has therefore increased “significantly”. Inflation rate is expected to reach “new highs” in the Autumn, and could reach the “order of 10 percent”. Outlook for inflation remains extremely uncertain, primarily due to the unclear situation on the commodity markets.

EU PMI Composite dropped from 49.9 to 49.2, an 18-month low. Economics Director at S&P Global Market Intelligence said: “The latest PMI data for the eurozone point to an economy in contraction during the third quarter of the year.

In the accounts of ECB’s July 20-21 meeting, it’s noted that “a very large number of members” agreed that it was appropriate to hike interest rates by 50bps. The 50bps hike was seen as “warranted in view of the worsening of the inflation outlook since the Governing Council’s June meeting”.

Focus shifts to US ISM (mfrg), employment data.

Currency technical levels: USDINR: 79.94/80.06 (Resistance), 79.70/79.55 (Supports), EURINR: 80.90/81.40(Resistance), 79.10 (Support), GBPINR:  95.40 (Resistance). JPYINR: 57.50-60 range.

Hedging advise: USDINR exports hedging can be deferred. Imports can be hedged. EURINR receivables be hedged on spike to 80.90, GBP Exports be hedged.