WEEKLY SYNOPSIS: 11/11/2022

Currency Map:

Brent Crude closed at USD 95.78 VS prior week close of USD 100.47. Gold closed at USD 1774. Nifty closed at 18349 vs prior week close of 18117. 10 Year G-SEC Yield closed at 7.30%.

Major developments: USDINR traded in the 80.58-82.32 range last week and closed at 80.81 loss of 1.97% for USD as against prior week close of 82.44. EUR climbed 2.15% w/w and GBP climbed 2.05% w/w against Rupee. Indian benchmark Equity index climbed 1.28% w/w. 10 Year G-SEC Yield closed at 7.30%. 1-year fwd premia is at 2.35% p.a. FX reserves stands at USD 529.90 bn as on Nov 4 th.  FX reserves declined by USD 1.09 bn as compared to previous fortnight.

Rupee gained One Rupee on Friday alone, triggered by a turn around in Global sentiments after US CPI data came lower than expected. FII’S Equity buying also propped up Rupee. Rupee’s turnaround has been equally stunning as its fall was. With Fed likely to slow down future rate hikes, Rupee may have seen its bottom at 83.30. However, with fluctuating data events and reactions, Rupee could correct Rs 1.50 to Rs 2.50. Hence, there is a high probability of USDINR retracing to 82 levels at the end of this wave of strength. RBI may also step in to shore its reserves and offer support to USD.

On data front, IIP climbed 3.1% in Sept. Manufacturing climbed 1.8% in Sept. Power generation climbed 11.6% and Mining grew by 4.6%.

USDINR’s resistance is at 81.25/81.65/81.95. Support is at 80.30.

Global developments: Turn around in USD fortunes and surge in riskier assets dominated market developments. The week before Fed Chairman’s hawkish message was met with heavy sell off in asset markets. However, with one month data softness, markets cheered and pared down next month rate hike to 50 bps. Despite easing of inflation by a pinch, it remains well above comfort Zone. Fed Chairman has already indicated that one month data is not sufficient to tone down its stance. Hence, it seems to be too early to declare that the fight against inflation is over. If retail sales, employment data and high rental prices remain resilient, markets may reprice its last week actions. Another challenge for the Fed is the inflationary nature of the market reaction. Lower real yields, weaker USD and higher commodity prices reflect easing financial conditions. If Fed, over the coming days, clearly communicates more dovish rates outlook, they risk fuelling the market rally and prolonging inflation. Hence, Fed may avoid giving positive reaction to Oct CPI. If rate hike is slowed, it is likely to stretch rate hikes well into 2023. Fed would like financial conditions to remain restrictive as the cost/benefit analysis favors hawkish stance and further rate hikes. The recent surge in commodity prices on hopes of China relaxing Covid policy is also a reminder that inflation control is also dependent on external developments.

Focus is on US retail sales.

Currency technical levels: USDINR: 80.30 (Supports), 81.25/81.65 (resistance), EURINR: 84.50(Resistance), 81.50 (Support), GBPINR:  93.50(Support)/ 96.50 (Resistance). JPYINR: 59.50 (resistance) /56.70 (support).

Hedging advise: USDINR Imports can be hedged on decline to 80.30, Exports can be hedged on rally to 81.65/81.95. EURINR payables be hedged at 81.50 and exports be hedged closer to 84.50.  GBP Exports be hedged on rally to 96.

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