USDIND FWDS DECLINE, FED TURNS DOVISH

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:

-Rupee gains on FII flows and dovish stance of Fed, Fwds decline as RBI is set to conduct swap.

-EU data triggers recession fear even as Fed downgrades growth forecast.

Important developments during last week:           Rupee closed at 68.96 as against prior week close of 69.09. Rupee has gained around 3 Rupees since Feb end on strong inflows. Robust FII inflows contributed to Rupee’s sixth consecutive  weeks of big gains. USDINR fwds declined to as low as 3.42% for 1 year, before there was a partial recovery to 3.55%. RBI is set to conduct swap on March 26 th. It remains to be seen as to whether fwd premia will sustain at 3.5% or climb back to 4% after the swap operation. Spot Rupee is unlikely to decline much above 70.40.Despite Crude prices rally, Rupee remained strong as March month witnessed heavy FII inflows into Equity and debt markets.

FII’S have invested  Rs 26232 Cr in Indian Equities in March. FII’S have nett bought Rs 39923 Cr of Indian Equities in this calendar Year till date. FII’S have invested Rs 14136 Cr of Indian debt securities in March. FII’S have nett sold Rs 2245 Cr of Indian debt in this calendar year till date.

On maro economic data front, Indian trade deficit for Feb declined to USD 9.6 bn vs estimated deficit of USD 13.7 bn. Exports climbed 2.4% to USD 26.7bn. Imports declined 5.4% to USD 36.3 bn. Oil imports declined to US 9.3 bn in Feb. FX reserves climb to USD 402 bn.

Global developments: Fed’s projection of Fed funds rate for next 3 years implied that only more rate hike is possible. Markets are discounting rate hikes and are factoring rate cuts as Global economic situation turns to the downside. EU and Japanese data on mfrg soured market optimism generated by Fed’s stance. USD recovered after a decline on Fed’s stance.

Fed statement was more dovish than expected. Fed will remain patient and will stop shrinking its balance sheet. Federal funds rates are projected to be at: 2.4% in 2019, revised down from 2.9%; 2.6% in 2020, revised down from 3.1%; 2.6% in 2021, revised down from 3.1%.GDP growth is projected to be at: 2.1% in 2019, revised down from 2.3%; 1.9% in 2020, revised down from 2.0%; 1.8% in 20201, unchanged. Unemployment rate is projected to be at; 3.7% in 2019, revised up from 3.5%; 3.8% in 2020, revised up from 3.6%; 3.9% in 2021, revised up from 3.8%. Core PCE inflation is projected to be at: 2.0% in 2019, unchanged; 2.0% in 2020, unchanged; 2.0% in 2021, unchanged.

Market watchers fear recession as the most reliable indicator – difference between 3 and 10 Year yield is on the brink of inversion.

US President said that punitive tariff on Chinese products could stay longer till China complies with any trade deal, if done. This is likely to derail the trade negotiation process.

BoE kept Bank Rate at 0.75% and asset purchase target at GBP 435B as widely expected. Both decisions were made by unanimous 9-0 vote. The central bank noted that economic data has been mixed since last meeting, but February Inflation Report projections “appear on track”.

BoE also noted that shifting expectations about the potential nature and timing Brexit have continued to generate volatility in UK asset prices, particularly the sterling exchange rate. Uncertainties also continue to weigh on confidence and short-term economic activity, notably business investment. Employment growth has been strong and indicators of consumer spending point to ongoing modest growth.

EU has extended time till Apr 12 th for UK’S deal to be passed by its parliament. Brexit uncertainty continues to weigh down on EU and UK growth.

Important developments for next week: US and UK GDP, Brexit vote.

Important levels to watch for are: 1) EUR/USD: 1.1120 on the downside and 1.1420 on the upside. 2) USD/INR Supports: 68.30 on the downside and 69.30/69.70 on the upside.

Market developments:

-Indian Nifty closed at 11456.

-Gold closed at 1313 and WTI Crude closed the week at USD 58.97.

-Indian 10 Year G-SEC closed the week at 7.34%. US 10 Year Yield closed at 2.437%.   

Data Highlights of last week:

-US factory orders climbed 0.1% m/m.

-US Weekly jobless claims dipped to 221k.

-US existing home sales climbed to 5.51 mn.

-EU PMI(mfrg) decline into contraction mode at 47.6 and PMI(services) held at 52.7.

-EU Zew improved to -2.5 and German zew survey indicator improved to -3.6.

-UK claimant count change was reported at 27k and unemployment rate declined to 3.9%. 

-UK CPI climbed 1.9% y/y, RPI climbed 2.5% y/y and PPI(output) climbed 0.1% m/m. Retail sales climbed 0.4% m/m.  

Technicals:

USD/INR : Spot closed below all major moving averages. 20 day moving average        is at 70.05. 50 day moving average is at 70.72. 200 day moving average is at 70.52. Daily MACD is in sell zone, implying top at 71.84. Important support zone is at 68.30.Important resistances are at 69.30 and later at 69.80.

EURO/USD: The pair is below all major moving averages. Next Major resistance is at 1.1450. Major support is at 1.1170. Daily MACD is in buy zone, implying an important bottom at 1.1170. Weekly MACD is in buy zone, implying important bottom at 1.1170.

GBP/USD: The pair is bullish and trading above major moving averages.Daily MACD  is in sell zone, implying important top at 1.3385 and weekly MACD is  in buy zone, implying important bottom at 1.2440. Important resistance is at 1.3385 and later at 1.3575. Important support is at 1.2950.

USD/YEN: The pair is below all major moving averages. Daily MACD is in sell zone, implying important top at 112.10. Next important resistance is at 112.10. Important support is at 108.50 and later at 107.80.

Suggested Portfolio: 1) Sell USDINR on rally to 69.75.        

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: House price index, building permits, consumer confidence, Pending and new home sales, weekly jobless claims, GDP(f), Chicago PMI, Personal income, spending, core PCE index EU data: German Ifo survey and retail sales UK: GDP(F) Japan: CPI, unemployment rate