WEEKLY SYNOPSIS: 09/09/2022

Currency Map:

Brent Crude closed at USD 92.40 VS prior week close of USD 96.50. Gold closed at USD 1727. Nifty closed at 17833 in Aug vs prior week close of 17539. 10 Year G-SEC Yield closed at 7.14%.

Major developments: USDINR traded in the 79.46-79.94 range last week and closed at 79.58 as against prior week close of 79.80. EUR gained 0.81% w/w and GBP climbed 0.29% w/w against Rupee. Indian benchmark Equity index climbed 1.67% w/w. 10 Year G-SEC Yield closed at 7.14%. 1-year fwd premia is at 2.90% p.a. FX reserves stands at USD 553 bn as on Sep 9 th. FX reserves has declined from its all time high of USD 650 bn.

Rupee gained on Friday as Crude declined below USD 90. Pullback by USD index from its all time highs also seems to have contributed to Rupee’s marginal gains.

Indian trade deficit widened to USD 28.68 bn, with exports flat and imports climbing 37% y/y. Imports is at US D 61.68 bn and exports is at USD 33 bn. Oil imports jumped 86.4% to USD 17.6 bn. Apr-Aug exports is at USD 192.52 bn, up 17.12% and Imports is at USD 317.8 bn, up 45.64%. In Apr-Aug period, trade deficit expanded to USD 125.22 bn from USD 53.78 bn during the same period last year. 

In Sep till date FII’S have net bought Rs 1333 Cr of Equities in Cash segment and have bought Rs 167 Cr of debt till date. In this Calendar Year, FII’S have sold close to Rs 1.50 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.

Crude Oil price decline augurs well for trade deficit and Rupee movement. USD Index may have also made a short term top. If USD INDEX pulls back, then Rupee could also start to climb. FII’S have started to invest since Aug. Focus is on CPI and IIP data.

Indian Equity indices are outperforming Global Equity indices, led by banking sector.

USDINR’s resistance is at 80.12. Support is at 79.30/79.20.

Global developments: Euro ended the week higher, supported by 75 bps rate hike. This marginal correction may not last longer as US data are stronger and Fed is on course to hike rates by 75 bps. Recent ISM (services) data points to strong demand components- business activity and new orders. Employment component is also strong. Fed’s beige report characterizes consumer spending as “steady” and points to expectations for further softening of demand over the next six to twelve months. On the other hand, respondents indicated that labor market conditions remained tight, but also pointed to a slower pace of wage increases and moderating salary expectations. Fed wants to soften demand as Fed Chairman was explicit by stating that the Committee wants to soften growth enough to “cause the labor market to get back into better balance, and then that will bring wages back down to levels that are more consistent with 2% inflation over time.”

US ISM Services PMI rose from 56.7 to 56.9 in August, above expectation of 55.4. Business activity/production rose from 59.9 to 60.9. New orders rose from 59.9 to 61.8. Employment rose from 49.1 to 50.2. Prices dropped from 72.3 to 71.5. ISM said: ” The services sector had a slight uptick in growth for the month of August due to increases in business activity, new orders and employment. Based on comments from Business Survey Committee respondents, there are some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Employment improved slightly despite a restricted labor market.”

“The past relationship between the Services PMI and the overall economy indicates that the Services PMI for August (56.9 percent) corresponds to a 2.5-percent increase in real gross domestic product (GDP) on an annualized basis.”

ECB increased three key interest rates by 75bps.The main refinancing , marginal lending facility and deposit facility rates are 1.25%, 1.50% and 0.75% respectively. The Governing Council also expects to raise interest rates further over the “next several meetings”. Decisions will continue to be “data-dependent” and follow a “meeting-by-meeting approach”.

ECB staff projections now show inflation averaging 8.1% in 2022, 5.5% in 2023, and then 2.3% in 2024. Recent data point to a “substantial slowdown” in growth, with the economy expected to “stagnate later in the year and in Q1 of 2023. Staff now projects the economy to grow by 3.1% in 2022, 0.9% in 2023, and then 1.9% in 2024.

Focus will be on US CPI data in coming week. Lower CPI data could offer support to crosses and riskier assets.

Currency technical levels: USDINR: 80.12 (Resistance), 79.30/79.20 (Supports), EURINR: 80.50/81.25(Resistance), 78.75 (Support), GBPINR:  93.45/94.75 (Resistance). JPYINR: 58 (resistance) .

Hedging advise: USDINR exports hedging can be done closer to 79.80/79.90. Imports can be hedged. EURINR receivables be hedged on spike to 80.90, GBP Exports be hedged and expanded at 93.45/94.50.