RUPEE GAINS, RBI CUTS RATES, US YIELDS DECLINE.

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. Equity markets volatile..

-RBI cuts rates by 25 bps.

-US Yields decline as market expectation shifts to US rate cut.

Important developments during last week:           Rupee closed at 69.47 as against prior week close of 69.69. Rupee gained last week as US yields declined and Crude prices fell further. Decline in Indian G-SEC yields also brought down annualised forward premia closer to 4%. Equity markets were volatile and ended the week on a positive tone. However, NBFC crisis and DHFL rating cut soured Equity sentiments. CPI and IIP data are important events for coming week.

RBI cut rates by 25 bps and changed its stance to accomodatory. GDP for 2019-20 is expected to be 7%. There was no specific formula for liquidity injection and help to cash starved NBFC’S. With GDP growth in a decline phase, RBI may cut rates again in August.

FII’S have nett bought  Rs 725 Cr of Indian Equities in June . FII’S have nett bought Rs 77884 Cr of Indian Equities in this calendar Year till date. FII’S have nett sold Rs 1289 Cr of Indian debt securities in June. FII’S have nett bought Rs 1389 Cr of Indian debt in this calendar year till date.

Rupee is likely to trade in the 68.30-70 zone. With USD showing weakness against majors, Rupee could also benefit.        

Global developments: USD declined against majors as yields tumbled on expectation of rate cut later this Year. Trade tensions and lower jobs growth with sundued inflation has made Fed members cautious and even dovish. Trade tensions took the center stage with US President hinting that he may impose higher tariffs on full Chinese imports. China retaliated cautioning that it will fight till the end. US escalated trade tensions with Mexico also. With Mexico agreeing to US demands, US has suspended the tariff imposition.

Fed Chairman said that Fed is “closely monitoring the implications of trade developments for the U.S. economic outlook”. And Fed ” will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.” His comments were taken a nod to cutting interest rates if outlook worsen on trade wars. US Equities and Asian markets soared on expectation of rate cut.  

IMF lowered growth forecast for China in 2019 to 6.2% (down from 6.3%). For 2020, growth forecast was cut to 6.0% (down from 6.1%). The IMF’s official noted that the economy stabilized in early 2019 reflecting a wide range of policy support. However, “renewed trade tensions” is a “significant course of uncertainty” that weighs on sentiment.

ECB left interest rates unchanged today as widely expected. That is, main refinancing, marginal lending and deposit rates are kept at 0.00%, 0.25% and -0.40% respectively. ECB changed the forwards guidance and said interest rates will remain at present levels “at least through the first half of 2020, longer than “the end of 2019”.                                    

ECB Chief noted that “most recent information indicates that global headwinds continue to weigh on the euro area outlook”. And, “the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets, is leaving its mark on economic sentiment.” Eurozone Q1 GDP growth was finalized at 0.4% qoq, unrevised. Over the year, Eurozone GDP grew 1.2% yoy. EU28 growth was finalized at 0.5% qoq, 1.5% yoy

Important developments for next week: Indian CPI, IIP and US CPI

Important levels to watch for are: 1) EUR/USD: 1.1110/1.0970 on the downside and 1.1375 on the upside. 2) USD/INR Supports: 69.05/68.90 on the downside and 69.75/70.05 on the upside.

Market developments:

-Indian Nifty closed at 11870.

-Gold closed at 1337 and WTI Crude closed the week at USD 54.05.

-Indian 10 Year G-SEC closed the week at 6.97%. US 10 Year Yield closed at 2.08%.   

Data Highlights of last week:

-US ISM (mfrg) dipped to 52.1, Prices paid component climbed to 53.2 and construction spending was flat m/m.

-US ISM(non mfrg) climbed to 56.9.

-US factory orders declined -0.8% m/m. ADP employment report showed that private sector added only 27k jobs, below expectation.

-US weekly jobless claims was unchanged at 218k and trade deficit for April is at USD 50.8 bn. US-China trade deficit expanded to USD 29.4 bn.

-EU CPI(flash) declined to 1.2% y/y and unemployment rate dipped to 7.6%.

-EU PMI(services) climbed to 52.9 and retail sales declined -0.4% m/m.

-UK PMI(construction) declined to 48.6. PMI(services) climbed to 51.

-EU PMI(mfrg) is at 47.7 and UK PMI(mfrg) contracted to 49.4.

-German retail sales declined -2% m/m.

Technicals:

USD/INR : Spot closed below major moving averages. 20 day moving average             is at 69.79. 50 day moving average is at 69.53.200 day moving average is at 70.85. Daily MACD is in sell zone, implying top at 70.54. Next support is at 68.90. Important resistance is at 69.75 and later at 70.05 .

EURO/USD: The pair is below 200 day major moving average and hence bearish. Next Major resistance is at 1.1375. Major support is at 1.1110 and later at 1.0970. Daily MACD is in buy zone, implying an important bottom at 1.1106. Weekly MACD is in sell zone, implying important top at 1.1570.

GBP/USD: The pair is bearish and is trading below major moving averages.Daily MACD  is in buy zone, implying important bottom at 1.2558 and weekly MACD is  in sell zone, implying important top at 1.3385. Important resistance is at 1.2865. Important support is at 1.2560.

USD/YEN: The pair is below  major moving averages. Daily MACD is in sell zone, implying important top at 112.40. Next important resistance is at 110.70 and later at 112.40. Important support is at 107.75.

Suggested Portfolio: 1) Sell USDINR on rally to 70+ with stop loss at 70.50.     

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: Sentix investor confidence and Industrial production UK: Industrial and manufacturing production Japan: