Currency Market 28-Feb: Risk Off grips global markets!

Globally, Free fall in equity markets continued as Dow Jones tumbled nearly 1200 points and S&P tumbled more than 4% in a single day. In current sell off, S&P corrected more than 10% in just 6 days, which is fastest on record. US 10 year bond fell to 1.26% and USD/JPY fell to 109 handle.  Monetary easing seems to be ‘Only game in town’ as market participants expect global central banks to ease monetary policy to support markets economy. Future Fed fund rates suggest 98.5% probability of a rate cut in March meeting and nearly 80% probability of 75 bps cuts in the current year. On other hand, Euro, being funding currency, remained major beneficiary of current sell off as EUR/USD rallied to 1.10 handle.

On domestic front, sell off in Nifty, trading near 11,300, continued for sixth straight session tracking its global peers. Interestingly, domestic bonds fell despite lower US treasuries and lower crude. G-Sec 10 year bond yield have spiked after taking support near 6.32%, which is a rising trend line support zone. On data front, CSO will release India’s GDP growth number for December quarter today at 5:30 PM. Bloomberg survey has pegged expected growth at 4.7% against 4.5% in September quarter. On currency front, Indian rupee is trading with weakening bias amid sell off over Corona Virus worries. Technically, USDINR pair has taken support near 71.55 levels, which was higher end of previous range 71.20-71.55. USDINR pair has immediate support at 71.80 levels and first resistance at 72.05 levels and second resistance at 72.25 levels. Range for day seen as 71.80-72.05.

Currency Market 26-Feb: Risk Reward Favors Selling EUR!

Globally, Equity markets continued to fall as Corona Virus spreads its global footprint. Dow Jones tumbled more than 3% to 27,081 levels and FTSE fell nearly 2% to 7,017 levels. On other hand, PBoc has set Yuan stronger reference rate at 7.0126 against 7.0232. Euro has been key beneficiaries of recent risk-off swings as it has been a funding currency. The EUR/USD pair climbed to a two week high levels of 1.0865 levels. It is noteworthy that economic data in Euro-Zone has been tepid and Corona Virus has been spread in Italy and Germany. Thus, EUR/INR can be sold at near 78.10 with stop above 78.52 for a target of 77.20 levels. 

On domestic front, RBI has announced next round of LTROs as it will auction INR 50,000 Cr for three years at 5.15%. It is noteworthy that 3 year LTRO received a better response than 1 year LTRO. Moreover, flow of liquidity in 1 year is smoother than 3 year period. Consequently, domestic 10 year G-Sec yield fell to 6.34%. The gains in domestic bond markets were further supported by cheaper oil and global yields. On currency front, USDINR pair is trading 10 paisa lower than yesterday at 71.75 levels. USDINR pair has resistance at 71.90 levels and support at 71.57-71.60 levels. Range for day seen as 71.57-71.90

Currency Market 24-Feb: Financial Markets tumbles on Virus Concerns

Globally, Risk off sentiments took center stage as Corona-virus infected cases increase outside China. South Korea, Italy and Iran now have more than 760,150 and 43 cases respectively. Consequently, USDCNH spiked to 7.0550 levels, Gold prices surged to $1643 and US 10 year yield tumbled to 1.48%. As discussed earlier that financial markets were under-pricing virus risk, thus this risk off move might extend in coming days. On other hand, US PMI data disappoint as manufacturing PMI fell to 50.8 and service PMI fell to 4 year low of 49.4 levels. Consequently, US dollar index corrected to 99.20 levels before finding bids owing risk-off swings.

On domestic front, Prime Minister Modi is hosting US President Trump, on his maiden visit to India. Although, a trade deal is not on the cards, but US and India can make significant bilateral announcements. Later today, RBI will auction 1 year term repo of INR 25,000 cr at 5.15%. It is noteworthy that previous auction of 3 year term repo had attracted 8 times the notified amount. Given, Banks have little restriction and fixed price auction, they are trying to out-bid each other on amount. On currency front, Indian rupee opened the session on a weak note, tracking its Asian peers, with USDINR opening at 71.90 levels. USDINR pair support at 71.70 levels and resistance at 72.05 levels. Range for day 71.75-72.05

Currency Market 20-Feb: US dollar 33 Month High!

Globally, PBoC has cut key interest rates (1 year by 10 bps and 5 year by 5 bps) to lend support to Chinese economy, which has been hit by an outbreak of Corona Virus. It is noteworthy that PBoC has been proactive in monetary easing, earlier it has done significant liquidity injections. Chinese yuan reacted adversely as USD/CNH spiked two month high of 7.04 handle. On other hand, US FED minutes showed that FED is likely to keep interest rates unchanged in near term. FED members were broadly optimistic about US economic activity. Consequently, US Dollar surged to fresh 33 months high of 99.71 levels.

On domestic front, USD/INR pair witnessed a gap up opening at 71.74 levels against previous close of 71.54. Interestingly, Rupee witnessed a gradual recovery tracking movement in Chinese yuan, which recovered to 7.025 from intraday high of 7.0405 levels. USDINR pair is currently trading at 71.56-57. The USDINR pair has immediate support at 71.54-55, first resistance at 71.70 levels and second resistance at 71.92 levels.

Long Term Repo Operations!

“It is important not to discount the RBI! It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges that the Indian economy” - Mr. Shaktikanta Das

Majority of market participants were expecting RBI MPC’s to be a mundane event with no change in interest rates. It was believed that the persisting slowdown might force RBI to remain on dovish tone despite spike in inflation. Although, retail inflation surged to 7.35% in Dec, outside the target range, but it is largely because of volatile vegetable inflation. Moreover, given lower crude prices and negative output gap overall inflation is expected to ease in coming quarters.

Interest Rate cut without sufficient transmission?  

In current cycle of interest rate cuts, RBI has already reduced rates by 135 bps and kept liquidity sufficiently positive. The transmission of excess liquidity and cuts has been lopsided across tenure. While short term rates have responded to policy adjustments the longer term yield remained sticky. For instance, overnight rates have reduced by 146 bps and 3-month CPs of non-banking financial companies reduced by 190 bps, suggesting sufficient transmission. On the other hand, 5 year government security yield reduced by 73 bps and 10 year government security yield corrected by 76 bps. Moreover, weighted average lending rates (WALR) on outstanding rupee loan corrected by just 13 bps during Feb-19 to Dec-19.

In this background, Mr. Shaktikanta Das said:“It is important not to discount the RBI! It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges that the Indian economy”. RBI announced Long Term Repo Operations (LTROs) to improve credit flow and transmission in the system. RBI will conduct LTROs of INR 1 trillion in 1 year and 3 year tenure at repo rate, i.e. 5.15%.

On prima facie LTROs will increase the durable liquidity of banking system and it should lead to better transmission. It is noteworthy that Banks can not lend funds for longer tenure using overnight excess liquidity, but additional durable liquidity should allow them to lend on longer tenure buckets. Consequently, Bond markets cheered the move with a yield curve shifting lower across the tenure.

	5-Feb (Pre Policy)	17-Feb	Change
1 Year	5.45%	5.3710%	8 Bps
3 Year	6.1100%	5.7840%	32 Bps
5 Year	6.2750%	5.9490%	32 Bps
10Year	6.5050%	6.3740%	13 Bps

As above table shows, Three and five year bonds are prime-beneficiaries of LTROs as five year G-Sec bonds rallied more than 30 bps. This has resulted to nearly 105 bps transmission against 73 bps earlier. USDINR 1 year forward premium has corrected sharply from 4.16%, pre-policy, to 3.87%. USDINR 1 year forward premium points has taken support near 8 month low of 272 points and now trading at 276.50 points.

At last, Reserve Bank of India, under Shaktikanta Das, has been proactive in using new tools (USDINR Buy/Sell Swap, Operation Twist and LTROs) for monetary transmission. Thus, it might pay dividend to remain on the side of the central bank!

Currency Market 13-Feb: CPI Surges to 7.59%

Globally, China’s Hubei reported 14,840 new cases and additional 242 deaths. As per officials the sharp increase in new cases is due to inclusion of “Clinically diagnosed” patients. Interestingly, market has given muted reaction as USDJPY slipped 20 pips to 109.88 and USDCNH spiked to 6.9850 levels. On other hand, Powell painted an upbeat picture of US economy, with strong labor market and consumer demand. Although, FED governor acknowledged possible risk of Corona Virus but overall impact is still uncertain. US dollar index surged to fresh five year high to 99 handle. The US dollar will take further cues from CPI data, due to release later during the day.

On domestic front, India CPI inflation continues to remain elevated with a reading of 7.59% in January. Food inflation, which is a major contributor to the headline, remained in double digit at 13.6%. A more worrying sign is pickup in core inflation, which spiked to 4.1% tracking spike in headline. Interestingly, domestic 10 year bond yields eased to 6.45% from intraday high of 6.4880%. It is noteworthy that RBI’s MPC expects CPI inflation to ease going forward with forecast of 3.2% in Q3 FY 20-21. India’s IIP contracted by 0.3% in December against growth of 1.3% in November. On currency front, USDINR pair is trading at 71.46-47 with a biddish bias tracking broad US dollar strength, weaker yuan and weaker domestic economic data. The gains in USDINR pair were further supported by heavy buying by PSBs. The USDINR pair has immediate resistance at 71.60-65 levels and support at 71.20 levels. Range for day seen as 71.35-71.60.

Currency Market 11-Feb: US dollar near 4 month high!

Globally, US dollar index surged to fresh four month high levels of 98.86 amid strong payroll number released last week. US non-farm payroll added nearly 225k jobs against expectations of just 163K. The gains in US dollar were further supported by rally in US treasuries. US Treasuries fell to 1.56% amid concerns over Coronavirus. It is interesting that financial markets are preferring to under-price virus risk rather than over-price. Frankly, it has paid dividend till now as central banks are ready to step up in event of higher downside risk from virus. On other hand, GBPUSD is trading near its two month low of 1.2910 levels. Cable will take further cues from UK’s GDP growth numbers, scheduled to release later during the day.

On domestic front, G-Sec yield curve seems to have stabilized after rallying significantly on ‘Long term repo operation’. It is noteworthy that RBI announced INR 1 trillion LTRO operation for 1 and 3 year period at 5.15%. Given, there is no specific target for these LTRO funds, further gains in yields should be limited as bond yield might start to catch up with fundamentals. The risk to this view is fresh round of LTRO operations. On currency front, USDINR pair is trading near 71.22-23 levels. The pair has resistance at 71.30 and support at 71.09 levels. Range for day seen as 71.09-71.30.

Currency Market 6-Feb: All Eye on RBI

Globally, Risk sentiments remain in charge despite the looming concerns over Coronavirus. Consequently, US 10 year bond yields rebounded to 1.66%, USDJPY surged to 109.95 and crude oil prices recovered to $ 56 per barrel. On trade front, China confirmed tariff reduction on some goods from US to take effect from Feb-14, lending support to risk sentiments. On other hand, US dollar index surged to two month high levels of 98.30 amid stronger economic data. US ISM non-manufacturing PMI released at 55.5 levels, underling strong economic activity. Europe’s retail sales contracted by 1.6% M-o-M, fueling selling pressure in EUR/USD. EUR/USD pair is currently trading near 1.0995 levels and it has key support at 1.0980 levels.

On domestic front, Reserve Bank of India is expected to keep interest rate unchanged and should maintain an accommodative stance. MPC’s outlook towards spike in inflation can be a major trigger for bond and currency markets. Retail inflation in December has spiked to 7.35%, primarily on account of food inflation. On currency front, USDINR pair is trading flat at 71.24-25 levels despite rally in Asian peers. D-mart is likely to raise INR 4,000 cr through QIP and Adani Electricity is also likely to trade $ 1 Bn through dollar bonds. The immediate resistance for the pair is 71.32-35 levels and first support for USDINR pair is at 71.15 and second support at 71.03 levels. Range for day 71.08-71.34

Currency Market 5-Feb: RBI Monetary Policy - A Dovish Hold

Globally, financial markets witnessed a relief rally amid PBOC cut interest rate by 10 bps and flushed the banking system with 1.7 trillion Yuan. Consequently, USDJPY spiked to 109.50 and US 10 year bond yields recovered to 1.58%. On other hand, GBP/USD pair tested 1.2940 levels before recovering to 1.3020 levels. Cable has been under significant selling pressure amid concerns over trade agreements. The GBP/USD pair will take further cues from UK’s service PMI and US ISM non-manufacturing PMI numbers.

On domestic front, financial markets are keenly awaiting RBI’s Monetary Policy announcement tomorrow. RBI’s MPC committee is expected to keep interest rates unchanged with repo rate at 5.15%.

	5-Dec (Policy)	5-Feb	Change Since Dec Policy
Crude Oil	63.39	54.63	-13.82%	Positive
Indian Rupee	71.28	71.2	0.11%	Flat
Nifty	12,042.00	11,999.00	0.36%	Flat
India 10 year	6.53%	6.51%	2 Bps Lower	Flat
US 10 year	1.79%	1.59%	20 Bps Lower	Positive
CPI Inflation (Dec)	7.35%		Outside RBI target range	Negative
Trade Deficit (Apr to Dec)	$118.1 Bn		Contracted sharply owing slowing economy	Positive
Fiscal Deficit (FY20)	3.80%		In line with expectation	Positive
Fiscal Deficit (FY21)	3.50%		Conservative estimate of tax collection but high disinvestment target	Neutral
PMI Data (Jan)	55.30		Underscoring the recovery	Positive

Table – Macroeconomic Parameter

Above table takes stock of various macro-economic parameters since last monetary policy on 5^th Dec-19.

Crude prices first spiked to $70 levels amid US-Iran conflict and now have corrected to $54.50 amid concerns of virus. Crude prices are nearly 13% lower from last policy level of 63.39.

Trade deficit (Apr-Dec) fell to $ 118.1 bn as non-oil non-gold imports continue to decline owing to slowing economy.

Fiscal deficit for FY 20 is now pegged at 3.8% against a target of 3.3%. FY-21 fiscal deficit is targeted at 3.5% of GDP. It is noteworthy that for tax collection estimates nominal growth is taken as conservative 10%. Moreover, government has also provide more clarity over off-balance sheet borrowing. One fiscal risk is ambitious 2.1 trillion disinvestment target for next fiscal. Thus, overall fiscal concerns should eased significantly, lending support to continued monetary easing.

CPI inflation has breached MPC’s target range with Jan reading at 7.35%, primarily on account of above 14% food inflation. It is noteworthy that core inflation remained under control at 3.7%. MPC’s view over spike in inflation being transitory or lasting will be closely watched.

Amid this backdrop, it seems that RBI’s MPC should prefer to remain accommodative and should deliver a dovish hold policy tomorrow. Thus, India 10 year bonds might break key support of 6.48-6.50% levels and might test 6.40%.

On currency front, USDINR pair is trading flat at 71.26-27 levels. The immediate resistance for the pair is 71.32-35 levels and first support for USDINR pair is at 71.17 and second support at 71.03 levels. Range for day 71.09-71.35