WEEKLY SYNOPSIS: 23/12/2022

Currency Map:

Brent Crude closed at USD 84.50 VS prior Week close of USD 79.25. Gold closed at USD 1806. Nifty closed at 17806 vs week close of 18269. 10 Year G-SEC Yield closed at 7.31%.

Major developments: USDINR traded in the 82.58-82.88 range last week and closed at 82.86 gain of 0.10% for USD as against prior week close of 82.77. EUR declined 0.40% w/w and GBP declined 1.41% w/w against Rupee. Indian benchmark Equity index declined 2.53% w/w. 10 Year G-SEC Yield closed at 7.31%. 1-year fwd premia is at 2.15% p.a.

USDINR pair held on to a tight range in lackluster trading. Selling was evident at 82.90. However, the pair could not break 82.57 also on the downside. Higher trade deficit, Year and month end flows are supporting the pair. Though Fwd premia has edged higher last week, it is still low and unattractive for long term receivables hedging. Recent movement in the pair gives a strong credence to RBI’s motive to keep Rupee in the 81-83 band. Fwd premia edged higher with 1 year premia climbing to 2.15% p.a.

In Dec, FII’S have bought Rs 2644 Cr of Equities till date and have sold Rs 3228 Cr of debt till date. In this Calendar Year, FII’S have sold close to Rs 1.14 lac Cr worth of Equities.

RBI’S Dec meeting minutes was confident about economy, though inflation would persist and requires calibrated approach. Agri output is likely to be better and Credit growth is robust. Government’s thrust on capital spending and infrastructure should bolster investment activity. According to the RBI’s survey, consumer confidence is improving. The economy, however, faces accentuated headwinds from protracted geopolitical tensions, tightening global financial conditions and slowing external demand. GDP growth is expected to be 6.8%.

USDINR’s support is at 82.57/82.37/81.95. Downside break of 81.95 would imply that recent move from below 81 is a correction and further consolidation could happen between 81 and 82.90.

Global developments: EUR/USD held to a tight range. Pound showed weakness and Yen gained on a surprise BOJ move. Equity markets cracked lower.

Big surge in Chinese Covid cases and BOJ’S tweaking of yield curve dominated market headlines. There are reports that China had 37 mn cases on Friday, the single daily biggest case load in Global epidemic history. China could slow down and it may negatively impact supply chains and trigger slow down in Global economy.

USD 10 Year yield moved higher and spread between 2 and 5 Year yield declined to 58 bps. The spread was around 82 bps , two weeks ago.

BoJ surprised markets by widening the band of 10-year JGB yield from 0.25% to 0.50%. At the same time, short term policy rate is kept unchanged at -0.10% as expected. Under the yield curve control framework, the central bank will still continue to purchases JGBs without an upper limit to keep 10-year yield at around 0%. But now, the bank will offer to purchase 10-year JGB yields at 0.50% every business day through fixed-rate operations, effectively allowing 10-year yield to rise towards 0.50% level.

ECB Vice-President sounded hawkish on Thursday, saying, “Increases of 50 basis points may become the new norm in the near term.” He said the ECB had to do more in the fight against inflation and voiced concern that the markets might underestimate the persistence of inflation. 

US GDP was finalized at 3.2% q/q as against prior data of 2.9% q/q.

US PCE price index rose 0.1% mom while core PCE price (excluding food and energy) rose 0.2% mom. PCE price index slowed from 6.1% yoy to 5.5% yoy, above expectation of 5.3% yoy. Core PCE price index slowed form 5.0% yoy to 4.7% yoy, matched expectations.

This data is still way above Fed’s 2% target. Fed may hike rates by another 50 to 75 bps in Q1 2023 and then may hit pause button to gauge lag effect of monetary policy. Already, housing, which is a interest sensitive sector, looks like slowing significantly. Existing home sales, housing starts and resale activity have slowed down and the effect will be more pronounced next year. Among other things, this view is based on expectations for a softening in labor market conditions, with the unemployment rate projected to rise 1.5 percentage points ahead. US GDP may slow down to 0.9% next year.

Events to focus: No major data release.

Currency technical levels: USDINR: 82.57/82.37/82.10/81.95 (Supports), 82.90 (resistance), EURINR: 89.45(Resistance), 86.45/84.90 (Support), GBPINR:  98.30(Support)/ 102.85 (Resistance). JPYINR: 63.50 (resistance) /61.30 (support).

Hedging advise: USDINR Exports can be hedged on rally to 82.90. EURINR exports be hedged closer to 88/89.  GBP Exports be hedged .

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