08/12/18

RBI MAINTAINS STATUS QUO, RUPEE VOLATILITY UNABATED

Highlights:

-GLOBAL and INDIAN MARKET DEVELOPMENTS

-DATA HIGHLIGHTS AND FX MARKET DEVELOPMENTS

-TECHNICALS

-STRATEGY FOR HEDGING AND SUGGESTED PORTFOLIO

-DATA AND EVENTS FOR NEXT WEEK.

Major economic events:

-RBI reduces inflation forecast.

-OPEC announces production cut.

-ECB meeting, Indian IIP and CPI are major events for the coming week.

Important developments during last week:           USDINR volatility remained elevated. The pair closed at 70.80 as against last week close of 69.58. Rupee gained in Nov, in tandem with steep fall in Crude prices and return of FII inflows.

Indian market development was anchored by RBI Credit policy. RBI maintained status quo on repo rate, which has been left unchanged at 6.5%. SLR has been cut by 25 bps to 19.5% and SLR will be cut by 25 bps every quarter till it reaches 18%. GDP for this fiscal year is maintained at 7.4%. Inflation forecast has been revised lower to 2.7- 3.2% for Oct-March period of 2018-2019. Non food credit (up 15.2%) has grown beyond nominal GDP growth. RBI maintained calibrated tightening bias despite downward revision in inflation.

RBI highlighted heightened financial markets volatility , global trade issues as major risk factors. RBI also maintained that durability of lower Oil prices have to be monitored as volatility is still high. RBI Governor maintained that 1 lac Cr liquidity has been injected in the last 3 months.

Lowering of inflation forecast and liquidity injection has softened 10 Year yields to 7.46%. It was at 8.2% in Oct. USDINR fwd premia has also fallen from 4.5% to 3.85% annualised.

USDINR’S reaction to OPEC decision on Oil cut has to be watched. Indian IIP and CPI are the major data events for the upcoimg week.

FII’S have sold Rs 109 Cr in Indian Equities in Dec . FII’S have bought Rs 9143 Cr of Indian debt securities in Dec till date . On a cumulative basis, FII’S have sold Rupees 26791 Cr of Indian Equities till date for this calendar year and have sold  Rupees 47914 Cr of Indian debt in this calendar year till date.

Global developments: Global asset market volatility remained elevated despite strong economic data from US. Global stocks rallied on the first trading week of the week on trade truce between US and China. However, the positive sentiment was short lived with the arrest of Chinese mobile and equipment manufacturer HUAWEI’S CFO by Canada at the behest of US. Market is still not convinced on US intention to back away from trade tariffs. The sentiment was soured further as Cinese trade surplus expanded further in Nov. Chinese trade surplus with the United States widened to $35.55 billion in November, compared with $31.78 billion in October. Trade surplus has widened to USD 293 bn in Jan-Nov 2018 as against USD 251 bn in the same period last year.   

The other important development centered on OPEC meeting. OPEC agreed to cut Oil production by 1.2 mn barrels per day to stabilise price.

Brent Crude has declined from USD 85 to USD 60 in a period of 2 months. Crude Oil rallied after this production cut announcement. It remains to be seen as to how US President reacts to this news as he has repeatedly called for lower Oil prices.

The inversion of US Yield curve has triggered fears of significant slow down or even a recession in 1-2 years time. 2 and 3 Year yields have risen above 5 Year, though 2-10 Year yield curve has just only flattened. It is being pointed out that this phenomenon has happened every time before a recession. However, the data in US is still robust. ISM surveys are in a healthy expansion mode with unemployment at 3.7%. Fed will be undettered by this new yield curve inversion development and is expected to raise rates by 25 bps.

ECB meeting and BREXIT developments are the major events in coming weeks.

Important developments for next week: Indian CPI, Industrial production and ECB meeting.

Important levels to watch for are: 1) EUR/USD: 1.12 on the downside and 1.15 on the upside. 2) USD/INR Supports: 70.30/69.50 on the downside.

Market developments:

-Indian Nifty closed at 10693.

-Gold closed at 1254 and WTI Crude closed the week at USD 52.14.

-Indian 10 Year G-SEC closed the week at 7.46%. US 10 Year Yield closed at 2.85%.   

Data Highlights of last week:

-US ISM(mfrg) climbed to 59.3, construction spending declined -0.1% m/m.

-US ISM (non mfrg) climbed to 60.7, beige book and ADP employment report showed 179k pvt sector jobs added last month.

-US Weekly jobless claims climbed to 231k and factory orders declined -2.1% m/m.

-EU PMI(services) was finalized at 53.4. Retail sales climbed 0.3% m/m.

-EU PPI climbed 0.8% m/m.

-EU PMI(mfrg) climbed marginally to 51.8.

-EU GDP (revised) was reported at 0.2% q/q.        

-UK PMI(mfrg) climbed to 53.1.

-UK PMI(construction) was higher at 53.4.

-UK PMI(services) declined to 50.4.

Technicals:

USD/INR : Spot closed below 20,50 and 100 day movong averages but still above 200 day major moving average. 20 day moving average     is at 71.29. 50 day moving average is at 72.55. 200 day moving average is at 68.78. Daily MACD is in buy zone, implying bottom at 69.50 . Important support zone is at 69.50.

EURO/USD: The pair is below major moving averages. Next Major resistance is at 1.1500 and later at 1.1620. Major support is at 1.12. Daily MACD is in buy zone, implying an important bottom at 1.1215. Weekly MACD is in sell zone, implying important top at 1.1805.

GBP/USD: The pair is below 200 day moving average.Trend is sideways in daily chart. Daily MACD  is in sell zone, implying important top at 1.3175 and weekly MACD is  in buy zone, implying important bottom at 1.2665. Important resistance is at 1.3175 and later at 1.33. Important support is at 1.2660.

USD/YEN: The pair is above major moving averages. Daily MACD is in sell zone, implying important top at 114. Next important support is at 112.30/111.35. Important resistance is at  114.10.                                                                                      

Suggested Portfolio: 1) Buy USDINR with stop loss at 69.45.             

Strategy for USD/INR:  USDINR payables can be covered from cost angle.              

Hedging suggestion:  Considering the volatility in the markets, suggest hedging of Currency exposures be done from costing/affordability angle.

Currency Map:

Data and Events for upcoming week: US Data: PPI, CPI, retail sales, industrial production and weekly jobless claims EU data: German and EU zew survey, industrial production, ECB meeting and PMI(services- flash survey) UK: GDP, industrial and manufacturing production, unemployment rate Japan: Tankan survey