FX-WEEKLY UPDATE

 

INFLATION DECLINES FURTHER, CRUDE CLIMBS 6% W/W.

 

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:

-Indian Inflation cools to 2.05%, raising further rate cut hopes.

-US-China trade talks progresses, risk appetite strong.

Important developments during last week:           Rupee closed at 71.23 as against prior week close of 71.31. However, Rupee was volatile as it first gained to 70.40 and then declined to 71.45. Rupee appreciated early in the week due to strong inflows related to acquistions. Rupee was also helped by benign inflation and steady yields. However it declined to 71.45 soon after inflows stopped. Rupee is also jittery as Crude prices rallied 6% last week due to Saudi refinery outage.

Economic data showed that inflation is very sudued, raising hopes for more rate cuts this Year. RBI has forecasted inflation at 2.8% for Q4. Jan inflation stood at 2.05%, lowest in 17 months. Food inflation was reported at -2.17%. IIP was subdued at 2.4% in Dec  as against 7.3% year ago.

 

IIP growth for Apr-Dec stands at 4.6%. Mfrg grew at 2.7% as against 8.7% in Dec 2017. Capital Goods grew by 5.9%, mining contracted by 1%, consumer durables grew by 2.9% and non durables grew by 5.3%.

FII’S have bought Rs 2566 Cr of Indian Equities in Feb. FII’S have bought Rs 2062 Cr of Indian Equities in this calendar Year till date. FII’S have sold Rs 150 Cr of Indian debt securities in Feb. FII’S have sold Rs 2752 Cr of Indian debt in this calendar year till date.

Crude rally is a concern for Rupee in coming weeks. If Oil prices continue to climb, Rupee is on the risk of breaching 71.85 levels.

Global developments: Risk appetite was strong as US – China trade talks seems to have made progress. Talks are set to resume in Washington again next week. US President and Congress avoided Govt shutdown, but the President clamped emergency to tap military funds for border wall with Mexico.

Crude prices climbed 6% due to disruption in Saudi Oil supply and boost in sentiment due to US – China trade talks. Supply could tighten by 0.5 mbpd.

US headline sales dropped -1.2% versus expectation of 0.1% mom rise. That’s also the largest decline in nine years since September 2009. Ex-auto sales dropped -1.8% versus expectation of 0.0% mom. Core CPI climbed 2.2% y/y and is well contained.

Eurozone GDP grew 0.2% qoq in Q4, unchanged from Q3 and matched expectations. Annually, GDP grew 1.2% yoy. Over the whole year 2018, GDP grew 1.8%. Employment grew 0.3% qoq, above expectation of 0.2% qoq. Germany GDP stagnated in Q4 and grew 0.0% qoq. But that was enough to narrow escape a technical recession following -0.2% contraction in Q3.

Japanese GDP grew 0.3% qoq in Q3, rebounding from Q3’s -0.6% qoq contraction. The good news is that Japan avoided a technical recession of two consecutive quarters of contraction. But growth was disappointing and missed expectation of 0.4% qoq.                    

Important developments for next week: FOMC minutes

Important levels to watch for are: 1) EUR/USD: 1.1215 on the downside and 1.1520/1.1580 on the upside. 2) USD/INR Supports: 70.85/70.40 on the downside and 71.45/71.80 on the upside.

Market developments:

-Indian Nifty closed at 10724.

-Gold closed at 1324 and WTI Crude closed the week at USD 55.80.

-Indian 10 Year G-SEC closed the week at 7.36%. US 10 Year Yield closed at 2.66%.   

Data Highlights of last week:

– US Core CPI climbed 0.2% m/m.

-US weekly jobless claims climbed higher to 239k, retail sales declined -1.2% m/m and PPI declined -0.1% m/m.

-US industrial production declined -0.6% m/m, NY mfrg index climbed to 8.8.

-EU industrial production declined -0.9% m/m

-UK CPI climbed 1.8% y/y, RPI climbed 2.5% y/y and PPI(output) was flat m/m.                      

-UK GDP grew by 0.2% q/q in Q4. UK economy contracted in Dec by -0.4% m/m. UK growth averages 1.4% y/y, slowest since 2012.

-UK industrial and manufacturing production declined -0.5% and -0.7% m/m respectively.

-UK retail sales climbed 1% m/m.

 

Technicals:

USD/INR : Spot closed below 20, and 100 day moving averages but still above 200 day major moving average. 20 day moving average         is at 71.23. 50 day moving average is at 70.86. 200 day moving average is at 70.20. Daily MACD is in sell zone, implying top at 71.84. Important support zone is at 70.40 .

EURO/USD: The pair is below 200 day moving average. Next Major resistance is at 1.1520 and later at 1.1570. Major support is at 1.1265/1.12. Daily MACD is in sell zone, implying an important top at 1.1520. Weekly MACD is in buy zone, implying important bottom at 1.1215.

GBP/USD: The pair is sideways and trading between major moving averages.Daily MACD  is in sell zone, implying important top at 1.3220 and weekly MACD is  in buy zone, implying important bottom at 1.2440. Important resistance is at 1.3220. Important support is at 1.2770.

USD/YEN: The pair is below major moving averages. Daily MACD is in buy zone, implying important bottom at 105. Next important resistance is at 111.50/112.

Suggested Portfolio: 1) Buy USDINR on decline with stop loss at 70.20.        

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:

Currency Pairs WEEKLY CLOSE PRIOR WEEK CLOSE % change
EUR/USD 1.1296 1.1330 -0.30
GBP/USD 1.2897 1.2945 -0.37
USD/JPY 110.50 109.75 0.68
USD/INR 71.23 71.31 -0.11

                                                                                                                                           

Data and Events for upcoming week: US Data: FOMC minutes, durables order, existing home sales, Phily Fed mfrg index and weekly jobless claims  EU data: PMI(mfrg and services), EU, German Zew surveys, German Ifo, EU CPI UK: Unemployment data Japan: CPI

 

 

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