Hedging Macros
The fall in USDINR from Tuesday’s high continued yesterday and we saw a low of 63.52, but it got halted there as PSU Banks stepped in strongly to load up on the greenback. Although the day’s range was as narrow as 8 paise, a lot of volumes went through with the PSU Banks soaking up a lot of supply. There was renewed talk of further reserve accumulation by the RBI as well as oil companies building position to meet the Iran oil payments. Stock market beat the global trend and ended strongly, but it seems to have hardly any bearing on the currency.
Continued rally in the Dollar Index has little impact on the rupee and barring steady buying by the Central Bank, we could have easily moved towards 63.10. But this is also making market players complacent and speculative market is still quite short. With some concerns about the monsoon having already emerged apart from anxiety about Government’s performance in the upcoming Monsoon session that has already been stalled, we are building a case for another short-squeeze.
Recently, Central Bankers of England and Japan have hinted at possible reversal in their monetary policies and this could lead to large unwind of carry trade. Rupee has been a major beneficiary of carry-trade and with some vulnerability re-emerging in the domestic scene, we think the reversal of EURINR, GBPINR and JPYINR shorts will impact the rupee negatively. This will also lead to FII demand for Dollars. We think a test of 64.00 is on the cards in the coming days, if not more.
GLOBAL MARKETS: U.S. and European stocks ended weaker overnight as poor corporate earnings continued to haunt investor mood. Wall Street declined for a second straight session on Wednesday as the technology sector fell on disappointing results from giants including Apple. Apple shares slumped 4.3 percent to $125.14, a day after the iPhone maker's revenue forecast for the fourth quarter fell below expectations, its biggest percentage drop since January 2014. Microsoft fell 3.7 percent, its biggest percentage drop since January, to $45.54 after reporting its biggest-ever quarterly loss, as the company wrote down its Nokia phone business and demand fell for its Windows operating system. The poorly received earnings report hit companies with close ties to Apple. In Europe, chip designer ARM Holdings, a major supplier, and German chipmaker Dialog Semiconductor, took a hit, dragging down the index there.
After the Greek saga ending, poor corporate earnings as well as a strong Dollar have started to hurt the U.S. stocks. U.S. companies were expected to report their worst sales decline in nearly six years. While some of the numbers so far announced have beaten expectations the giants of the market have disappointed the investors. Markets have already rallied quite a bit from the July lows even as Greek issue got resolved and investors need some new trigger to increase their commitment to stocks which are already loftily valued. Poor earnings reports have given reason to investors to unload their recent purchases helping keep the indices in the broad recent range.
With no major economic data due to be released in the next few days, market will continue to watch the corporate numbers and with summer vacation in full swing, there is hardly any interest to push the market in either direction strongly and we will continue to see reaction of short term players to news.
G7 CURRENCIES: Currencies have slipped into range movement with sparse economic news pushing it up and down but unable to create a directional move. Exception for this is the Canadian Dollar which made a new low against the USD as crude prices again slumped (higher stock piles report from the U.S. not helping). USDCAD traded just a shade lower than its 2009 high of 1.3063. The currency market has been listless this week as Greece's debt crisis has waned and investors/traders ponder the timing of a Federal Reserve rate increase this year. The FED meets next week and the statement post that will be watched closely. There is some excitement in GBP as it repeatedly attempts to break higher from the recent range. Yesterday’s MPC minutes indicated more members may be leaning towards an early rate rise. Today’s Retail Sales data assumes importance in this context as higher economic activity will support an action from BOE ahead of market expectations.
Overnight, Reserve Bank of New Zealand cut their policy rate by 0.25%. But NZD has actually inched up after the event as the cut was lower than expected by the market and the Central Bank sounded less dovish in their statement. They also did not hint at another move at September meet. Overall, we feel commodities and the related currencies are oversold and we might see a serious correction in this space.
While a rate hike in U.S. has been talked about for long and is somewhat discounted in the price, reversal of monetary stance in other countries would be a surprise to the market. Historically, the monetary policies of major countries in G7 have moved in tandem and if that were to be repeated, we see Dollar’s further ascent being muted. We might well see USD giving up gains against majors, while EM currencies could take a hit due to carry unwinds. WE WATCH THE EM CURRENCIES CLOSELY.
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