10/06/18

RUPEE VOLATILITY CONTINUES, RBI HIKES RATES BY 25 BPS

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 volatility extends, RBI intervenes

-RB hikes rates by 25 bps, maintains neutral stance.

-US Trade tensions with EU and China continue.

-Focus is on Fed, ECB and BOJ meetings.

Important developments during last week: Rupee declined 45 ps w/w (0.67%) to close at 67.50 as against 67.05 last week. Rupee had a roller coaster ride between 66.85 and 67.78. Friday was eventful as Rupee declined to 67.78 at one stage. RBI stepped in to sell USD aggressively and this action stemmed Rupee’s free fall. RBI has spent over USD 13 bn in last few weeks to support Rupee as evidenced in FX reserves fall. RBI’S action implies that USDINR could oscillate in the 67-68 range for some more period. Though RBI Governor did not admit that rate hike is linked to Rupee fall, it looks that was also a reason. Indonesia and Turkey have hiked rates agressively to defened their currencies. If US Yields continue to climb higher, RBI may be forced to hike rates by 50 to 75 bps in this year. It was also surprising and confusing to read RBI’S neutral stance after hiking rates for the first time in 4 years.      (contd.,)

RBI increased repo rates by 25 bps unanimously to 6.5%, but maintained neutral stance. GDP growth is expected to be 7.4% for this year. Inflation is expected to be 4.8 to 4.9% for first half and 4.7% for second half of this Year. Banks have been allowed to spread MTM losses in investment portfolio over 4 quarters.

FII’S have bought Rs 2756 Cr of Indian Equities in June till date . FII’S have sold 475 Cr of Indian debt securities in June till date . On a cumulative basis, FII’S have bought Rupees 6194 Cr of Indian Equities till date for this calendar year and have sold  Rupees 31788 Cr of Indian debt in this calendar year till date.

Focus is now on IIP and CPI data.

Expect USDINR to trade in the 66.85-68 range in coming weeks.

Global developments: Trade tensions and likelihood of ECB ending QE dominated market developments last week. There are no signs of US backing down on trade tariffs. G-7 leaders had candid discussions with US President on trade tariffs. It’s reported that G7 leaders confronted US President with trade statistics to persuade him from slapping tariffs on the allies. But US President stood firm with his stance victimizing the US in international trade, countering with his own set of numbers. G-7 summit ended in confusion as US President refused to endorse joint communication agreed before his departure from Canada.  

Fed is meeting in the backdrop of strong US economic data. US Q2 growth is likely to be 4% and annualized growth is expected to be 3% this year with healthy wage growth and 18 year low unemployment levels. Consumer price inflation is above 2.0%, a sign that the U.S. economy is bumping up against capacity constraints. With higher fuel prices, higher import prices due to increased tariffs, and strong wage growth, consumer price inflation is expected to accelerate.

Geoplotical risks also remain elevated due to trade tensions and retaliation and policy mis steps are likely to rattle financial markets and business confidence. Emerging markets remain at the mercy of developments in OECD countries and investors prefer safety than returns in uncertain environment.                                                                                                            

Euro climbed higher on hope that ECB may take a call to end asset program in its upcoming meeting.  ECB Chief economist has noted “there is growing evidence that labour market tightness is translating into a stronger pick-up in wage growth”. And, signals showing the convergence of inflation towards our aim have been improving, and both the underlying strength in the euro area economy and the fact that such strength is increasingly affecting wage formation supports our confidence that inflation will reach a level of below, but close to, 2% over the medium term.” Eurozone GDP was finalized at 0.4% qoq in Q1, unrevised.

Bank of Japan is also meeting this week.

Important developments for next week: Indian IIP and CPI. FED, ECB and BOJ meetings.

Important levels to watch for are: 1) EUR/USD: 1.15 on the downside and 1.1840/1.1960 on the upside. 2) USD/INR Supports: 66.50 on the downside and 67.80/68.40 on the upside.

Market developments:

-Indian Nifty closed at 10767.

-Gold closed at 1303 and WTI Crude closed the week at USD 65.57.

-Indian 10 Year G-SEC closed the week at 7.95%. US 10 Year Yield closed at 2.94%.   

Data Highlights of last week:

– US factory orders declined -0.8% m/m.

-US ISM (non mfrg) climbed to 58.6.

-US weekly jobless claims was reported at 222k.

-German factory orders declined -2.5% m/m.

-German industrial production declined -1% m/m.

-EU PMI(services) was finalized at 53.8 and retail sales climbed 0.1% m/m.

-EU sentix investor confidence dipped to 9.3 and PPI

-UK PMI(construction) climbed to 52.5 and PMI(services) climbed to 54.

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 67.63. 50 day moving average is at 66.63. 200 day moving average is at 64.66. Daily MACD is in sell zone, implying top at 68.42 . Important support zone is at 66.85. Important resistance is  at 67.80 and later at 68.40. 

EURO/USD: The pair is below all major moving averages. Next Major resistance is at 1.1840 and later at 1.1960. Major support is at 1.1508. Daily MACD is in buy zone, implying an important bottom at 1.1508. Weekly MACD is in sell zone, implying important top at 1.2560.

GBP/USD: Trend is bearish in daily chart. Daily MACD  is in buy zone, implying important bottom at 1.3205 and weekly MACD is  in sell zone, implying important top at 1.4375. The pair is trading below all major moving averages. Important resistance is at 1.3450 and later at 1.3550. Important support is at 1.3205 and later at 1.3050.          

USD/YEN: The pair is above major moving averages. Daily MACD is in sell zone, implying important top at 111.40. Important support is at 108.10. Important resistance is  111.40 and later at 113.75.                                 

Strategy for USD/INR: USDINR payables can be covered from cost angle and exports can be covered on rally due to extended rally.

Suggested Portfolio: 1) Buy USDINR on dips with stop loss at 66.85.                     

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: CPI, PPI, retail sales, industrial production, NY mfrg index, TIC purchases, FOMC meeting, weekly jobless claims,  EU data: ECB meeting, CPI, Zew surveys, employment report and industrial production UK: Industrial and manufacturing production, CPI, PPI, RPI, unemployment rate Japan: BOJ meeting.

USD/INRCHART: