Currency Map:

Currency PairsDEC CLOSENOV CLOSE% change

Brent Crude closed at USD 85.70 VS prior month close of USD 87.58. Gold closed at USD 1823. Nifty closed at 18105 vs Nov close of 18758. 10 Year G-SEC Yield closed at 7.32%.

Major developments: USDINR traded in the 80.99-82.92 range in Dec and closed at 82.73 gain of 1.60% for USD as against Nov close of 81.42. EUR climbed 4.2% m/m and GBP climbed 1.99% m/m against Rupee. Indian benchmark Equity index declined 3.5% m/m. 10 Year G-SEC Yield closed at 7.32%. 1-year fwd premia is at 2.12% p.a.

Expanding Current account deficit and steep reversal in FII flows bruised Rupee in 2022. Russia-Ukraine conflict and pandemic also cast its shadow on Global and domestic economy, directly affecting Rupee. Rupee declined 11.28% y/y. Rupee has declined from 74.34 (Dec 21 close) to 82.73.

Rupee could not gain in last few months, despite steep reversal in Crosses against USD. Another feature was the steep fall in fwd premia in USDINR pair. This could be attributed to narrowing rate differentials between USD and Rupee. India’s Q2 Current account deficit widened to 4.4% of GDP, from 2.2% in Q1. CAD is at USD 36.4 bn, up from USD 18.2 bn in Q1. CAD was at USD 9.7 bn (1.3% in Q1 21-22).Trade deficit expanded to US 83.5 bn in Q2 as against USD 63 bn in Q1.

On macro front, inflation and declining exports are major concerns. Inflation is well above RBI’S mandated upper limit of 6%. RBI has raised repo rates by 135 bps this year to 6.25%. GDP is expected to be 6.8% in 2022. GST collections has remained steady at around 1.45 lac Cr/ month. In this Calendar Year, FII’S have sold close to Rs 1.06 lac Cr worth of Equities.

RBI intervened on either side of Currency movement. RBI spent over USD 100 bn this year to check a steeper fall in Rupee. As Rupee gained below 81, RBI was active and mopped up reserves. FX reserves stands at USD 562 bn as on Dec 30 th.  FX reserves has declined 72 bn y/y and around 44.5 bn from March 2022.

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 latest Dec data, Retail inflation eased to 5.88% in Nov. This is better than Oct data of 6.77%. CPI has come below the Reserve Bank of India’s (RBI) upper margin of 6 per cent for the first time in the calendar year 2022. Core CPI eased to 6.1%. Food inflation eased to 4.67% from 7.01%. IIP contracted -4% in Oct. IIP rose 4.2% in Oct. The industrial output so far in the fiscal year 2022-23 (April-October) has risen 5.3 per cent

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.

Indian benchmark index Nifty gained 4.3% y/y. This is against a fall of 19.2% in US index S&P 500. EM index declined 22% and MSCI Asia index declined 19.6% in 2022.

USDINR’s supports are at 82.57/82.40/82.10. Downside break of 82.10 would imply that recent move from below 81 is a correction and further consolidation could happen between 81 and 82.90.

Global developments: USD’s rise and subsequent fall since Sept, steep rise in Global Yields and softening of Crude prices in the last few months of 2022 dominated market headlines. Global markets are also negatively impacted by Russia- Ukraine conflict and pandemic. Recent surge in Covid infections in China and consequent travel restrictions again remind us of 2020 developments. Supply Chain issues, which were normalising, could again be a victim if Chinese Covid infections remains high for a higher period of time.

Global inflation is the dominant issue and Central banks action took center stage in 2022.

Fed raised rates steeply from around 0.25% to 4.25-4.5% levels, with no indication of terminal rates. Fed hiked rates by 50 bps in Dec and could again raise rates by around 1% in Q1 2023. ECB and BOE have also hiked rates and pledged to keep rates high to combat inflation.

US 10 Year yield spiked to 4.25% and then retreated to 3.5%. It is now back to 3.87%. 2 year- 10 Year Yield inverted to 82 bps spread, which is a sign of recession in coming quarters. The spread has since narrowed to 55 bps.

Brent crude is up 10% y/y, despite a fall of 39% from its March peak of USD 140. US, EU sanctions and Russian Oil price cap along with OPEC supply cut have distorted market’s natural demand/supply driven movement.

USD index gained 7.6% in 2022, despite a fall of around 9.8% from its peak of 114.78 in Sept.

This year also witnessed erratic movement in GBP/USD. In Sept, the pair fell to 1.0350. in 3 months period, it reversed to 1.2450. GBP/USD is still down 10.37% y/y. EUR/USD is down 6% y/y.

US economy is sending mixed signals. While leading indicators are flashing recession next year, incoming data is still strong. Tight labor market, higher than expected services data and consumer spending bely future forecasts.  Business orders are contracting, consumer morale is low and retailers are also struggling to offload inventories. Yield inversion and weaker Dollar works against Fed’s objective. The dichotomy of forward and backward looking indicators is a headache for Fed and if they press ahead with present data, they could inflict economic damage next year.

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.

JPY gained on the above development. USDJPY is trading at around 131.10 as against 150 levels in Oct.

US S&P is down 19.5% y/y. Tech heavy Nasdaq has declined 33% Y/Y. Apple lost a third of its value y/y, Amazon lost half of its valuation since the beginning of the year and, this month, became the first US big cap to lose more than $1 trillion in valuation. Netflix lost up to 75% of its value compared to November 2021 peak, and Facebook scraped 77% of its value since September 2021 peak. Tesla is down 75% from its peak.

Cryptos saw massive outflows with failures of 2 big outfits.

Gold weathered asset storm and closed flat y/y.

Summary of 2022: It is the end of easy money era and Central banks have learnt the lesson of negative impact of easy money. Central banks would be pulling out liquidity further in 2023 and will play a subdued role to fix problems created by them. Though, hope is there for resilience, there are fears of economic recession, inflation and stagflation. Let us hope for the best and pray to the almighty for healthy world and prosperity.

Events to focus: US and EU mfrg data, FOMC minutes and US employment data.

Currency technical levels: USDINR: 82.57/82.40/82.10/81.95 (Supports), 82.90 (resistance), EURINR: 89.45(Resistance), 87.50/86.40/85.55 (Support), GBPINR:  99/98.50(Support)/ 102.60 (Resistance). JPYINR: 64 (resistance) /61.30/60.50 (support).

Hedging advise: USDINR Exports can be hedged on rally to 82.90. EURINR exports be hedged closer to 89.45.  GBP Exports be hedged .

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