Market Pulse: Weekly report for 2-6 July 2012

Currency market: The change of guard in the Finance Ministry and the reins into the hands of PM has indeed reversed rupee sentiment from bearish to neutral. Rupee held its weakness below 57.32 (all time low) to complete end-to-end move within the set near term range of 55.50-57.50. The reversal into 55.50 (high of 55.60) was swift driven by panic selling from exporters before close of week at 55.62. The swift move saw series of resistances at 56.40/56.15/55.85 taken out without any semblance of fight from the dollar bulls. The strong weekly close at 55.62 against previous close of 57.12 says it all. Exporters were seen running for “life” having missed above 57 with “fear” of run-away extended rupee gains into 54-52. Now, it is important for the PM to “undo” the factors that triggered rupee fall to regain bullish confidence on the rupee. Rupee was indeed trading comfortably at 48.50-49.00 (pre budget high of 48.60) till release of Budget FY13; post-budget disappointment pushed rupee sharply down to 55 into mid quarter June Monetary Policy review (pre policy high of 54.92); disappointment in the monetary policy pushed rupee further down to over 57. There was also a “minor” disappointment last week on delivery (of reforms) much below expectations but there was quick damage control to prevent posting of a new all-time low above 57.32.

Over all, disappointment from the Budget and fear of delay in shift into growth supportive monetary policy is seen as major factors that lead to rupee fall from 48.60 to 57.32, and the need now is to get the rupee back to 48.60 through delivery of expectations that would address major issues relating to Capital Account flows and twin deficits, thereby removing the risk of extended stagflation of the Indian economy. What next? As Phase I, it is important to provide 100% unwind of rupee losses from its pre-monetary policy high of 54.92 to post-policy low of 57.32. The “unwind” journey has already completed two-third of the distance in quick time and it is matter of one trading day to hit 54.92. Beyond there to begin the Phase 2 of the journey from 54.92 to 48.60, it would need roll-out of next generation reforms attracting long term capital account flows into core sectors of the economy and release of pressure on fiscal deficit through roll-out of price hike in diesel, kerosene and cooking gas. The ability of the Government to get political consensus to these critical issues is in doubt at this stage. However, there is confidence that Opposition parties will extend support (on issue based basis) during this crisis period to prevent the worst on the economy. These actions from the Government will provide comfort to RBI for shift into growth supportive monetary stance.

The strategy of MARKET PULSE was to sell 3M 10Y dollars on extended rupee weakness above 57.00 and asked importers to await reversal into 54.00-52.50. Why beyond 3M? While the near term outlook is uncertain which could have extended rupee weakness into 57.90-58.50, short/medium/long term outlook for rupee is bullish. Rupee is grossly undervalued (above 57) to sustain there for long. The sharp reversal in Crude and commodity prices is very good news for India and possibility of medium/long term sustainability of commodity prices at current levels is strong given the current weak state (and health) of global economy and favourable geo-political developments. The flow of external liquidity and capital into India will be there to stay for long period as western economies are not expected to get into aggressive growth momentum till 2014-2015 if not beyond. India will remain as attractive destination if GDP growth can be maintained at 6-7%. The pressure will be on exports (and Current Account Deficit) which could be addressed through reduction in non-essential imports; lower consumption of essential imports and roll out next-generation export reforms across sectors with long term vision to turn surplus in Current Account.

Till such time, Balance of Payment position is not expected to turn “deficit” as flows into debt and equity capital market will be ensured to meet deficit in current account; hike in FII limit for investment in Gilts by USD 5 Bio is case in point. For the week, let us watch 54.00-55.50 with bias into lower end but extended gains below 54.00 (into 52.95) is not expected to sustain till the Government walk the talk. It will be good to unwind part of “short” June 2013 dollars at 57.25-57.00 (against entry at 60.00-60.50). It is also good for importers to cover 1-3M imports (September 2012 dollars at value below 55). If all goes well on delivery of expectations from the Government and RBI, rupee should get into consolidation mode at 51-54 into the short term. 

EUR/USD held well at the solid support/buy zone at 1.2425-1.2450 (low of 1.2405) and reversal from there hit the first objective set at 1.2700-1.2750 (high at 1.2692) before close of week at 1.2660. In the meanwhile USD Index lost steam above strong resistance at 82.60 for back into 81.50. The expectation into the EU summit was low but delivery beyond expectation brought “awe” feeling into the market to drive the USD Index down as investors turned into “risk-on” mode. The next target for EUR/USD is at 1.2875-1.2925 (not ruling out extended run into 1.3050-1.3100) while 1.2600-1.2550 stays firm. USD Index is also expected to extend its weakness into strong support zone at 81.20-80.90 (ahead of 80.50/79.65). For the week, let us watch 1.2600-1.2900 with bias into higher end, not ruling out extended gains into 1.30. The strategy is to stay “long” at 1.2625-1.2575 (with stop below 1.2550) for 1.2825/1.3000.

USD/JPY lost steam above strong resistance at 80.50 (high of 80.59) but sharp reversal from there held above strong support at 79.10 (low of 79.14) before close of week at 79.77. Ideally, this currency pair should remain weak while 80.50-80.75 resistance zone stays firm for test/break of 79.10 into 77.75 ahead of final objective at 76.00-75.50 before sharp reversal. For the week, let us watch 79.00-80.50 with bias into lower end, not ruling out extended weakness into 78.50-77.75. The strategy is to sell at 80.25-80.75 with tight affordable stop for 79.15/78.65/77.65. In the meanwhile, EUR/JPY was volatile within strong support at 98.50 (low of 98.30) and strong resistance at 101.60 (high of 101.39) before close of week at 101.02. This currency pair is giving bullish signals for extended gains above 101.60 into 103.25. The strategy is to stay “long” at 100.50-100.00 with stop below 99.75 for 103.00-103.25.

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