29/09/18

FOMC HIKES RATES, RBI MEETING IN FOCUS

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 consolidates, Equities decline steeply.

-RBI is expected to hike rate by 25 bps on Oct 5 th.

-FOMC hikes rates by 25 bps, indicates 5 more rate hikes till 2020.

Important developments during last week:           Indian Rupee closed at 72.48 as against prior week close of 72.19. Rupee is now consolidating in the 71.50-72.95 range over the last 11 trading sessions. Crude oil rally, decline in Equity indices and FII pullouts continue to cloud Rupee’s outlook. The week was dominated by fall out of IL&FS default. NBFC and Housing finance companies came under pressure in Equity markets. RBI facilitated more liquidity by allowing banks to use 2% of SLR for liquidity coverage. This could expand liquidity by 2 lac cr.

Indian Govt raised customs duty on 19 items to curb non essential imports and to stem Rupee fall. However, Crude price rally may still derail Govt efforts. Saudi Arabia has refused to increase Oil production. As Iranian sanctions are nearing, crude price may continue to climb higher, exerting pressure on Rupee.                                                                                

FII’S sold Rs 7924 Cr of Indian Equities in Sept . FII’S  sold Rs 9858 Cr of Indian debt securities in Sept . On a cumulative basis, FII’S have sold Rupees 7923 Cr of Indian Equities till date for this calendar year and have sold  Rupees 48631 Cr of Indian debt in this calendar year till date.

What to watch: RBI meeting on Oct 5 th- RBI is expected to raise rates by 25 bps, notwithstanding dip in last month inflation data. RBI may also address liquidity concerns and detail steps to meet Rupee decline.

Global developments: Fed’s action was the highlight of the week. Fed’s statement indicates that economy is robust, labor market is getting tighter and inflation is creeping above target, warranting furrther rate hikes till 2019 and early 2020. On Friday, USD gained as Euro slumped on below expected EU CPI data and higher budget deficit aimed by Italy.

Fed increased rates by 25 bps to 2.25% and indicated one more rate hike in Dec, 3 rate hikes in 2019 and one rate hike in 2020. Fed modified its statement to remove the phrase of “accomodative monetary stance”. Fed expects GDP growth to be 3.1% (up from 2.8%) for 2018 and 2.5% for next year. Unemployment rate is expected to be 3.7% in 2018. PCE index (inflation measure) is expected to be around 2.1% in 2018 and around 2% in 2019.

Important developments for next week: RBI meeting, US nonfarm payrolls.

Important levels to watch for are: 1) EUR/USD: 1.1525/1.13 on the downside and 1.1820 on the upside. 2) USD/INR Supports: 71.50/70.70 on the downside and 72.95 on the upside.

Market developments:

-Indian Nifty closed at 10930.

-Gold closed at 1196 and WTI Crude closed the week at USD 73.53.

-Indian 10 Year G-SEC closed the week at 8.02%. US 10 Year Yield closed at 3.06%.   

Data Highlights of last week:

-US personal income climbed 0.3% m/m, spending also climbed 0.3% m/m, Core PCE index was flat m/m.

-US house price index climbed 0.2% m/m and consumer confidence climbed to 138.4.

-US durables order climbed 4.5% m/m, GDP(final) was in line with expectation at 4.2% q/q.

-US Pending home sales, weekly jobless claims was reported at 214k.

-EU Core CPI (flash) declined 0.9% y/y.

-German Ifo survey climbed to 103.7.

-UK GDP(final)            was at 0.4% q/q.      

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 72.10. 50 day moving average is at 70.33. 200 day moving average is at 66.89. Daily MACD is in buy zone, implying bottom at 68.30 . Important support zone is at 71.50/70.70 and later at 70.30. Important resistance is at 72.95.                 

EURO/USD: The pair is below major moving averages. Next Major resistance is at 1.1820 and later at 1.1960. Major support is at 1.1525 and later at 1.13. Daily MACD is in sell zone, implying an important top at 1.1820. Weekly MACD is in sell zone, implying important top at 1.2560.

GBP/USD: Trend is sideways in daily chart. Daily MACD  is in sell zone, implying important top at 1.33 and weekly MACD is  in sell zone, implying important top at 1.4375. The pair is trading below 200 day moving average. Important resistance is at 1.33 and later at 1.3560. Important support is at 1.3010/1.2960 and later at 1.2785.               

USD/YEN: The pair is above major moving averages. Daily MACD is in buy zone, implying important bottom at 109.70. Next important support is at 111.85/109.70. Important resistance is at  114.70.   

Suggested Portfolio: 1) Buy USDINR on decline with stop loss at 71.50.                

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: ISM(mfrg and non mfrg), construction spending, factory orders, ADP employment data, weekly jobless claims, nonfarm payrolls and trade balance EU data: PPI, PMI, retail sales, unemployment rate UK: PMI(mfrg, services and construction) Japan: