Nifty may retrace 5500; rupee seen heading to 67/$: CLSA

The uptrend seen in emerging markets (EMs) over the past week is a relief rally and the downward trend is likely to extend, Laurence Balanco, Asian Technical Research, CLSA told CNBC-TV18. The broader MSCI EM index will not only retest June lows but may also break those levels, he cautioned.

Meanwhile, he expects the Nifty to be rangebound between 5500 and 6100 levels. Although Nifty is trading at the top of the trading range, it may not break on the upside but could retrace back to 5500 levels, he added. According to him, EM and Asian currencies are likely to see further weakness and the rupee is likely to head to 67 against the dollar. Also read: Will China experience a 'hard landing' in 2013? Below if the verbatim transcript of his interview on CNBC-TV18 Q: How are you reading this pullback in emerging markets (EMs), is it a start of a new trend or do you think it is just a pullback from oversold ground with the medium term charts still looking shaky? A: For the EMs we have seen a lot of damage done to the price action and over the past two months, we have broken below the simple 50-100 day moving averages and we have also broken below the support of the 2011 lows. Momentum indicators confirmed the lows that we saw late June. They did get to extremely oversold conditions so the base case rests on that. The rally that we have seen over the past week is more of a relief rally rather than something more meaningful. Q: So how are you trading this pullback in EMs? Technically do you think there is going to be a big retracement again or are markets going to hang about in a range for a while because of the pressure with which they fell the first time around? A: It will vary from EM to EM but if we talk about the broader MSCI EM index we do think we will retest the June lows and probably break below those levels. So we think the downtrend will extend. If you look the Nifty is range bound and we think base case scenario remains that it will be in the range of 5500 to 6100. Currently in local currency terms, we are close to the upper end of that trading range but we don't expect it to break to the upside. Q: How does this tie in with your expectations on the dollar index because that has had important ramifications for EM currencies too? A: It is best to look at the broader trade weight to dollar index rather than the DXY that a lot of people focus on. If you look at broader base dollar index, you have seen a meaningful base been put in place for that which does suggest that dollar strength and emerging currency weakness. Another way to look at it is - if you look at the Asian dollar index, it actually shows that a number of Asian currencies have broken down versus the dollar. So we are expecting further weakness for the EM and Asian currencies after a brief pause and correction here. _PAGEBREAK_ Q: The Nifty has also pulled back from 5700 to around 6000 levels. How would you approach the index in the light of the pullback of the last couple of days? A: The rebound that we have seen is towards the top end of the trading range that we have seen developing from the past four months for the index. It has really been in that range for 5500 to the 6100 area. So, our preferred strategy looking at just from an index point of view would be the rally to fade up at this level and look for retracement back towards a 5500 area. I think that will be the best case scenario that it just remains within that range. Q: What about the Indian rupee versus the dollar, what kind of levels could you be staring at? A: Currently, we have seen an initial upside target, so if we go back 12 months ago you had this consolidation or a triangle pattern that the rupee was in. It broke out of that pattern and gave us a minimum upside target of 61 against the dollar. That has been met and now we have seen the rupee consolidates here. The next level once this consolidation pattern plays out is a move up towards the 67 area. Q: The one that seems to be breaking out over the last fortnight or so is crude prices. What do you foresee on those charts? A: You have to be cautious in looking at the oil complex. If you look at WTI which is out of the US, that has broken out of a meaningful 12 month consolidation pattern which does support further upside. If you look at Brent crude out of Europe that still remains range bound but the very short-term charts has again broken out of a small consolidation pattern. So, the energy complex does suggest upside both in Brent and WTI, with WTI being more a bullish set up. So look at the spread between WTI and Brent continuing to expand. Q: Indian banks have looked quite vulnerable over the last few weeks and have led the downsides in the market. If you track either the bank index or influential banks like ICICI Bank or State Bank of India (SBI), how do those technicals looks? A: If you look at the CNX banks index and some of the banks that you mentioned, the key technical feature is the double top pyramids played out. We saw a peak earlier on in the year, a pullback in April and then we saw recovery in May, then we failed at the January peak and now we are sitting back at the April lows. There seems to be a double top pattern in place for a number of banking stocks. If you look at it in relative terms to the Nifty, we have seen the relative shorts already break below the April lows. So basically, in relative terms you have got a trend of underperformance. Therefore, banks look like they will continue to underperform through the rest of the summer.