Hedging Macros

USDINR: We saw hectic buying in the pair on Friday as equities took another big hit and global sentiment remained gloomy. We broke the recent range of 66.10 and 66.30 and traded a high of 66.51 as importers were seen very actively covering on all dips. The inability of the pair to sustain a move below 66.00 has prompted corporate to cover their near term payables and sellers are conspicuous by their absence. Caution ahead of the crucial Non-Farm Payrolls data from the U.S. also encouraged longs. We saw good and steady offers from the PSU Banks but it only provided liquidity to the market that was hungry for Dollars. While there has been continued short-covering in the EURINR carry trades, JPYINR buybacks saw some momentum putting more pressure on the Rupee.

Rupee is still drawing influence from the global market developments and the FII premium for Indian assets has reduced. As the view on global stocks is bearish for medium term, the foreign fund flow will get affected at least for now and that will keep the USDINR bid. As equity bears get upper hand, we are also hearing analysts getting worried about shortfall in monsoon and political equations not getting better for the ruling party making reforms process difficult. Although India will remain one of the best destinations to invest for long term, investors will wait for overall sentiment to improve before committing themselves more. Our near term range projection of 66.00 and 66.50 is not valid anymore and we are likely to see retest of recent high at 66.76 and if that gives way, 67.10-20 is on the cards. Bear play on the rupee seems to be gaining force and we recommend using all dips below 66.40 to cover near term imports.

GLOBAL MARKETS: Markets remained firmly in the grip of Bears. Despite ECB?s supportive move all the indices declined with force on Friday with EMs taking a big hit. MSCI's all-country world stock index slid 1.65 percent, and lost 3.7 percent for the week, while its emerging markets index fell 1.96 percent and lost 3.8 percent for the week. Good employment report from the U.S. failed to lift the glum mood in the market and investors continued to focus on tepid growth in the global economy, slowdown in China and possible interest rate rise by the FED. In a minor sign of improved sentiment heading into the weekend, all three major U.S. indices moved up from lows of around 2 percent in the latter part of the session. But they still ended the week in the red, with the Dow down 3.2 percent, the S&P off 3.4 percent and the NASDAQ falling 3 percent. Today, markets have opened steadier as China opened after two days of market close. With Chinese Yuan trading steady and Shanghai Index marginally positive, at least we are starting the week with steadier nerves.

GLOBAL MARKETS: Global markets rallied yesterday after the ECB President vowed to beef up or extend the economic stimulus if needed, keeping in mind the poor outlook for growth. European markets particularly made hefty gains. U.S. markets started with more than a per cent gains, but gave up most of it as investors became cautious ahead of the crucial jobs report on Friday. Economic data showing the U.S. trade deficit shrank in July to its lowest level in five months as exports rose broadly. Other reports showed activity in the global manufacturing and service sectors expanded in August at the same pace as in July, with both the U.S. and euro zone doing better than Asia. Markets missed cue from the Chinese markets as they are closed on Thursday and Friday.

However, after a waterfall like decline in the global stocks last couple of weeks, it is natural to see some violent moves both ways and that?s being driven by bouts of good and bad news. Lot of position adjustments by both short term and medium term players are contributing to the two-way volatility. As major concerns still remain about the path that Chinese economy will take from here on and timing FED rate hike, investors/traders are not keen to be long. The weekend meeting of G20 Central Bankers expressed support for the Chinese measures to steady their economy. With major data points having already been published, all eyes now turn to FOMC meet next week. Opinion is once again divided on whether they will meddle with rates now or later. We feel, FED may actually raise the rate this month and get done with the suspense which is keeping an uncertain and nervous mood in the markets. They may also indicate no hurry to hike further unless economy expands strongly. This could steady the markets and allow investors to assess how the global economy fares before taking the next directional call. The sharp correction in the valuation may also avert further sell-off without any fresh bad news.

G7 CURRENCIES: Currencies have continued to take cues from the stock market moves. As we witnessed fresh slide in equities on Friday (despite decent jobs report from the U.S.), EM and commodity currencies took another hit while the carry currencies EUR and JPY gained against the Dollar. The good report on jobs (despite slightly smaller number of fresh jobs created) showing fall in unemployment rate and rise in real wages, increases the chances of FED rate hike this year and an action at next week?s meeting is not ruled out. The numbers were probably consistent with 2 to 2.5 percent GDP growths in U.S. at best; good enough to begin the normalization of U.S. rates but not good enough to serve as a locomotive for the rest of the world which is the reason growth currencies continued to sag.

The EURO seems to be enjoying support below 1.11 as it is serving as "safe haven" for investors along with YEN, while there is no respite for commodity and EM currencies which are hit badly by global slowdown led by China. The ebb and flow in global risk appetite, heavily influenced by Chinese economic data and its volatile stock markets, has recently influenced the Dollar?s day-to-day direction. But the broad theme continues to be pressure on EM and commodity currencies with the EUR and JPY only oscillating with gyrations in „risk? sentiment. Despite the ECB?s averments yesterday, we feel EURO will not crash too far from here unless fears of further unwinding of carry-trades fade. We feel the stocks are in a medium term decline and investors will continue to reduce their exposure to EMs. FED raising rate is almost certain this year and there will be more repatriation of Dollars by investors as EM countries will pursue easy policy to boost growth. If the global „risk off? sentiment intensifies (we expect it will), we think JPY will be a strong gainer as it has been a carry currency for almost three years now and the carry unwind will continue.

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