21/07/18

YUAN WEAKNESS HITS EM CURRENCIES, RUPEE RECOVERS MARGINALLY ON RBI INTERVENTION

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 recovers from 69.12 on RBI intervention.

-Yuan declines, Crude falls.

-US President calls Yuan and Euro weakness as deliberate and vows more trade retaliation.

Important developments during last week: Indian Rupee pulled back from its life time low of 69.12 on RBI intervention. The pair closed at 68.84, decline of 31 ps for Rupee as compared to prior week close of 68.53. Rupee’s decline tracked Yuan weakness and EM currency sell off. Equity markets withstood Global headwinds and closed flat w/w. Modi Govt defeated no confidence motion with ease and removed any spectre of political uncertainity. Crude decline should be helpful for Rupee in coming weeks. There were no major economic data.          

FII’S have sold Rs 2788 Cr of Indian Equities in July till date . FII’S have sold Rs 1934 Cr of Indian debt securities in June till date . On a cumulative basis, FII’S have sold Rupees 1249 Cr of Indian Equities till date for this calendar year and have sold  Rupees 43252 Cr of Indian debt in this calendar year till date.                                                                         

Global developments: USD suffered sell off on Friday as US President turned his attention to Chinese Yuan and Euro. He was aided by US Treasury Secy who said that US will review whether China is deliberately manipluating its Currency. There was no let off in trade war verbal exchanges as US President said that he is ready to levy additional tariff on the entire Chinese imports totalling US D 500 bn annually.

Earlier in the week, Yuan declined triggering sell off in EM Currencies as trade war verbal exchanges intensified. US trade representative openly blamed Chinese President, inviting strong rebuttal from Chinese spokesperson. There is a growing perception that China is allowing Yuan depreciation to counter US trade tariff threats. Pboc fixed Yuan lower for the seventh straight day.

EU trade official said that EU is preparing counter balance measures if US implements tariff on autos from EU.

US economy continued to remain upbeat despite the fear of slow down triggered by protectionism. Fed Chairman echoed this upbeat view in his testimony to Congress. He noted the strong labor market, rising after-tax incomes, and healthy growth in business investment. He also praised progress on the inflation front, and somewhat downplayed the risk stemming from trade protectionism noting that “the risks to the outlook were roughly balanced”. He concluded, that “the FOMC believes that, for now, the best way forward is to keep gradually raising the federal funds rate.” In other words, current trade risks are not enough to derail the Fed from hiking rates on a quarterly basis.

US President was critical of Fed rate hike decisions.

IMF  retained global growth of around 3.9% for 2018 and 2019. But “risk of worse outcomes has increased, even for the near term.” In particular, it noted that “risk that current trade tensions escalate further—with adverse effects on confidence, asset prices, and investment—is the greatest near-term threat to global growth.”

It added that the US has ” initiated trade actions affecting a broad group of countries” and “faces retaliation or retaliatory threats from China, the European Union, its NAFTA partners, and Japan, among others.” Based on their modeling, IMF official said the trade policy threats could lower global output by around 0.5% by 2020. The US is “especially” vulnerable as it’s the “focus of global retaliation”.                      

IMF projects Indian GDP to grow by 7.3% this year and 7.5% next year.

Focus is on US GDP (advance) estimate.

Our analysis of the Global situation: USD rally may hit a pause as the US administration is focussing on Currency movement. China may slow down Yuan decline to offer a reasonable chance for US to pull back from its brinkmanship. Euro/USD may reverse to 1.1960 with 1.15 being a soild support. Crude prices decline may continue, albeit at slower pace offering respite to consumers. These developments can provide respite to Rupee decline. Downside break of 68.60 will help Rupee gain further.

Important developments for next week: ECB meeting and US GDP

Important levels to watch for are: 1) EUR/USD: 1.15 on the downside and 1.1850/1.1960 on the upside. 2) USD/INR Supports: 68.60/68.30 on the downside and 69.10 on the upside.

Market developments:

-Indian Nifty closed at 11010.

-Gold closed at 1231 and WTI Crude closed the week at USD 68.13.

-Indian 10 Year G-SEC closed the week at 7.79%. US 10 Year Yield closed at 2.89%.   

Data Highlights of last week:

-US retail sales climbed 0.5% m/m and NY mfrg index climbed to 22.6, better than consensus.

-US industrial production climbed 0.6% m/m and TIC purchases was at USD 45.6 bn.

-US building permits dipped to 1.27 mn, housing startsdeclined to 1.17 mn.

-US weekly jobless claims declined to multi decade lows of 207 k. Phily fed mfrg index climbed to 25.7.

-EU CPI was finlaized at 2% y/y.                                                                                  

-UK retail sales declined -0.5% m/m.

-UK CPI climbed 2.4% y/y, RPI climbed 3.4% y/y and PPI(output) climbed 0.1% m/m.

-UK unemployment rate was steady at 4.2% and claimant count change was reported at 7.8k.

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 68.65. 50 day moving average is at 68.08. 200 day moving average is at 65.63. Daily MACD is in buy zone, implying bottom at 68.30 . Important support zone is at 68.30 and later at 67.70. Important resistance is at 69.70.

EURO/USD: The pair is below 100 and 200 day major moving averages. Next Major resistance is at 1.1850 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 sell zone, implying important top at 1.3365 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 1.3365 and later at 1.3475/1.3650. Important support is at 1.2770.

USD/YEN: The pair is above major moving averages. Daily MACD is in buy zone, implying important bottom at 109.35. Next important support is at 110.85. Important resistance is  113.20.      

Strategy for USD/INR: USDINR payables can be covered from cost angle and exports can be covered.                                

Suggested Portfolio: 1) Sell USDINR on rally with stop loss at 69.12.                

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: Existing and new home sales, durables order, house price, index weekly jobless claims, GDP (advance)  EU data: PMI, German Ifo, consumer confidence and ECB meetingUK: Japan: