NEW RBI GOVERNOR SET TO EASE LIQUIDITY, FOMC MEET IN FOCUS

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:

-New RBI Governor takes over.

-Indian inflation eases further. IIP surges.

-Fed could hike rates, but pay pause rate hike for 2019.

Important developments during last week:           It was a eventful week. Mr Patel resigned as RBI Governor and was swiftly replaced by former Economic affairs Secy Mr Shathikant Das. Govt’s stance on consultation on Credit flow, liquidity and RBI Governance structure may have forced Mr Patel’s exit. The new Governor has started consultation with bank heads and is expected to ease credit flow to MSME’s and facilitate 4 PSU banks to exit PCA norms. Steep fall in inflation may also force RBI MPC to shift stance from tightening to neutral. RBI may even reduce rates by 25 bps in Feb meeting.

Indian markets rallied on hopes that new RBI Governor may be more helpful is easing lending norms and smoothen relationship with Govt.                                                 

USDINR volatility remained elevated. The pair closed at 71.90 as against last week close of 70.80. RBI checked Rupee fall at 72.40. Considering the stabilisation in Crude price and the likely dovish stance of Fed in its upcoming meeting, we could expect Rupee to gain.

The consumer price index- (CPI-) based inflation rate fell to a 17-month low of 2.33 per cent in November against 3.38 per cent in October as food prices continued to fall for the second month in a row. IIP climbed 8.1% in Oct. Mfrg climbed 7.9%, consumer durables output grew by 17.6% and Capital Goods climbed 16.8%.

FII’S have bought Rs 2358 Cr of Indian Equities in Dec . FII’S have bought Rs 1512 Cr of Indian debt securities in Dec till date . On a cumulative basis, FII’S have sold Rupees 24323 Cr of Indian Equities till date for this calendar year and have sold  Rupees 55544 Cr of Indian debt in this calendar year till date.

Global developments: We are heading into an important week as FOMC, BOE and BOJ meetings are scheduled. While BOE and BOJ may maintain status quo, FOMC may hike rates by 25 bps and then possibly indicate pause in rate tightening. If this is to happen, USD may decline notwithstanding waning EU growth and lower inflation in EU. This move could help EM currencies to rally and help Gold and base metals to climb. Slowing Global growth, trade tensions and near neutral rate in US may be cited as possible reasons for pause in rate hike. Equity markets may rally significantly, if Fed indicates pause in rate hike cycle.

US growth is set to slow down in 2019 with lower inflation but still solid employment growth.

US – China trade talks resumed and helped Global sentiments. US President said that Fed Chairman is very aggressive on interest rate hike.

ECB maintained status quo with a dovish bias. ECB maintained forward guidance that interest rates will “remain at their present levels at least through the summer of 2019”. Also, the asset purchase program will end this month as scheduled. ECB lowered growth forecast to 1.9% for 2018 and 1.7% for 2019. Inflation is now projected to be at 1.8% in 2018 (1.7% prior), 1.6% in 2019 (1.7% prior). ECB Chief said that balance of risk is tilted to the downside. German Ifo institute slashed German growth rate to 1.1% for 2019, down from earlier forecast of 1.9%. 

Important developments for next week: FOMC meet, BOE and BOJ policy meet.

Important levels to watch for are: 1) EUR/USD: 1.12 on the downside and 1.15 on the upside. 2) USD/INR Supports: 71.15/69.50 on the downside.

Market developments:

-Indian Nifty closed at 10805.

-Gold closed at 1242 and WTI Crude closed the week at USD 51.23.

-Indian 10 Year G-SEC closed the week at 7.44%. US 10 Year Yield closed at 2.90%.   

Data Highlights of last week:

-US PPI climbed 0.1% m/m. CPI was flat m/m.

-US weekly jobless claims declined to 206k.

-US retail sales climbed 0.2% m/m and industrial production climbed 0.6% m/m.

-EU PMI(services) declined to 51.4.

-German and EU Zew surveys improved to -17.5 and -21 respectively. EU industrial production climbed 0.2% m/m.

– EU sentix investor confidence declined to -0.3.

-UK claimant count change was reported at 21.9 k and unemployment rate held steady at 4.1%.

-UK Industrial production declined -0.6% m/m and manufacturing production declined -0.9% m/m.

Technicals:

USD/INR : Spot closed above 20,100 and 200 day movong averages but still below 50 day major moving average. 20 day moving average     is at 71.07. 50 day moving average is at 72.35. 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 sell zone, implying an important top at 1.1470. Weekly MACD is in sell zone, implying important top at 1.1805.

GBP/USD: The pair is below 200 day moving average.Trend is bearish in daily chart. Daily MACD  is in sell zone, implying important top at 1.3175 and weekly MACD is  in sell zone, implying important top at 1.3298. Important resistance is at 1.27 and later at 1.29. Important support is at 1.2475 and later at 1.2360.

USD/YEN: The pair is above major moving averages. Daily MACD is in buy zone, implying important bottom at 112.20. Next important support is at 112.20/111.35. Important resistance is at  114.20/114.60     

Suggested Portfolio: 1) Buy USDINR with stop loss at 71.10.              

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: FOMC meet, Housing starts, building permits, NY and Phily Fed mfrg index, TIC purchases, existing home sales, personal income, spending, durables order, Core PCE index weekly jobless claims EU data: German Ifo survey, CPI UK: CPI, RPI, PPI, retail sales, GDP and BOE meet Japan: BOJ policy.