Making Sense

"What we hope ever to do with ease, we must learn first to do with diligence" Asian markets are trading higher as China resumes after week long Lunar Holidays. China re-opening alongside lower quantum of rate hikes from the US Fed has lifted the sentiment around EM currencies.  USDCNH (6.75) is now back in the consolidation range of 6.65 - 6.78 in which the currency was trapped from May until mid August 2022.  USDKRW (1228) is trading below the May 2022 lows and now finds support at 1206-1207 levels. USDTHB (32.73) is also fast approaching the Feb 2022 lows at 32.07. While KRW and THB have appreciated over 15% against the USD followed by CNH, IDR has been a relative underperformer, appreciating only 5.50% from peak to trough.  USDJPY has been facing resistance at 130.60 - 131.00 levels since 23rd Jan 2023 with market consensus leaning towards further widening of the YCC band. Today, a report by a panel of academics and business executives urged the BOJ to make its 2% infl...

 A slew of U.S. economic data were released today.  Pending Home Sales rose 2.50% mom against prior revised contraction of 2.60% (prior -4%). Pending home sales sank 33.8% yoy. However, the current surprise uptick in pending homes sales suggests a bottom could be in the offing. The University of Michigan Sentiment rose to 64.90 from prior 64.60 Personal Consumption Expenditure fell 0.20% from prior revised number of 0.10% contraction Core PCE Price Index rose 0.30% mom (4.40% yoy) vs prior 0.20% (4.70%) Market pricing of interest rates continues to be stable. 2Y US Treasuries trade at 4.21% while 10Y trades at 3.52% but the 2Y and 5Y USD SOFR swaps are trading right at 4.22% and 3.41% respectively. The DXY Index is down 11.50% since Sep end and has taken support at 101.50 for the last 8 trading sessions. The index looks ripe for a corrective bounce but in absence of a catalyst, we like to stay on the sidelines or invest about 20% of the capital just to dip our hands.

 The big news today morning was the release of the Tokyo CPI Inflation. The core CPI for the area of Tokyo in Japan jumped 4.3% in January 2023, accelerating at the fastest pace since 1981 and exceeding forecasts for a 4.2% rise amid broadening inflationary pressure. Tokyo’s core inflation rate, a leading indicator for nationwide price trends, also followed a revised 3.9% gain in December and surpassed the Bank of Japan’s 2% target for the eighth straight month, signaling that upward price trends in the country have not reached its peak yet. **trading economics The BoJ announced the  Funds-Supplying Operations to Support Financing for Climate Change Responses for a notional of $ 21.73 bn as yields inched closer to the upper bound of the YCC band at 0.50%. The CPI data sparked a sell off in yields in the Asian session with US 2YT at 4.19% and US 10YT at 3.53% and the 2x10 inversion at 66 bps. Domestic yields also opened higher with 10Y treasury trading at 7.39% from Wednesday's...

""Objective analysis should be made of the reaction to the event rather than the formation of the Opinion" US Q4 GDP grew 2.90% vs consensus expectations of a 2.60% growth and Q3 growth at 3.20%. The US Markets rallied on the economic news with S&P 500 closing the session at 4060.  GDP = C + I + G + NX Though the headline print is strong, the internals paint a mixed picture.  Consumer spending +2.1% vs +2.3% prior Net trade added 0.56% to GDP vs adding 2.86% in Q3 Inventories added 1.46% vs a cut of 1.19% in Q3 Govt added 0.64% vs +0.65% in Q3 Within residential fixed investment, the leading contributors to the decrease were new single-family construction as well as brokers' commissions.  Hopes of a soft landing increased as the headline number is strong but the activity is slowing and the growth in inventories in the context of the current global macro environment is not construed as a positive. Instead of a hard landing, the market narrative has been increasing...

 In my earlier  post , I had promised to cover more on forwards. In the earlier post on Jan 23, 2023, I had written  "A quick look at the pattern of outstanding RBI forward book shows that in the last 2 years, RBI is seen paying forwards in the last quarter of the FY. In 2021, RBI's forward book swelled from o/s longs of $ 47.38 bn in Jan 2021 to $ 72.75 bn in March 2021. In 2022, a similar pattern was observed where the book swelled from $ 50bn in Jan to $ 66 bn in March 2022." That prompted the question around the cause of such paying activity. A market veteran guided me to look at RBIs behavior from a balance sheet and capital management perspective and it now makes sense. So what happens when RBI intervenes in spot market: When RBI buys foreign exchange, the Net Foreign Assets rise on the RBI's Balance Sheet.  In lieu of FX purchases, RBI releases INR liquidity in the banking system which the banks deposit as reserves. So the size of the RBIs Balance sheet increa...

EURUSD is currently trading at 1.0880 steadily climbing for 83 trading days off lows of 0.9534 in Sep 2022 shortly after the peak in natural gas prices and a peak in trade deficit . A steady run of 14.60%.  Look at how Euro Area trade deficit worsened in the aftermath of the Russia - Ukraine war. Do we see an opportunity to sell into the rally yet?  Let's look at two aspects here -  1. What are the interest rates telling you?                Key ECB Rates                Deposit facility     2.00 %                Main refinancing operations 2.50 %                Marginal lending facility   2.75 % Market implied interest rates are pricing in a peak terminal rate of 3.5%. Next 5 policy meeting dates are 02 Feb 23 / 16 Mar 23 / 04 May 23 / 15 Jun 23 and 27 Jul 23 where in t...

The Union Budget is drawing to a close and I thought of putting down my estimates for the Government Borrowing program.  GoI will present the Union Budget on Feb 1 , 2023.  In accordance with the amendment to the FRBM act, GoI targets to reach the fiscal deficit level below 4.5% of GDP by 2025-26. The Finance Minister said, “We plan to continue with our path of fiscal consolidation, and intend to reach a fiscal deficit level below 4.5% of GDP by 2025-2026 with a fairly steady decline over the period. We hope to achieve the consolidation by first, increasing the buoyancy of tax revenue through improved compliance, and secondly, by increased receipts from monetisation of assets, including Public Sector Enterprises and land.” This entails an annual reduction of 60 - 65 bps in the fiscal deficit number.  Accordingly, FY 24 fiscal deficit is pegged at 5.80% and gross borrowing at 16 trn. For FY 24, budget comes ahead of a heavy state election schedule and 2024 Lok Sabha electi...

I wrote in my earlier  blogpost - US Market Wrap  why I do not like to chase the current momentum lower in yields.  US2YT has been facing resistance at 4.18% since late November 2022 and though US yield fell below 4.18% to trade a low of 4.12%, the yields have since bounced back towards 4.18%. Likewise, the US10Y has been facing resistance at 3.44% since Dec 2022. The 10Y yields fell to lows of 3.32% last week to bounce back higher and currently trades at 3.47%.  Data releases last week pointed to deteriorating economic fundamentals on the Retail Sales (-1.1% mom), Industrial production (-0.70% mom), housing starts (-1.4% mom) and building permits (-1.60% mom). However, the labor market continued to be resilient with initial jobless claims at levels lowest since late Sep at 190K. This made me question if the current market pricing has run ahead of itself and the same is covered  here .

 RBI released the November monthly bulletin.  Operations in the OTC segment show RBI net bought $ 4.36 bn of foreign currency and accumulated the long forward book to the extent of $ 8.25 bn with total outstanding forwards at $ 8.49 bn. RBI had unwound the forward book from a peak of $ 65.79 bn in March 2022 to $ 241 mn in Oct 2022 on FPI outflows and rising trade deficit.   You could refer to the  Oct 2022  data here. A quick look at the pattern of outstanding RBI forward book shows that in the last 2 years, RBI is seen paying forwards in the last quarter of the FY. In 2021, RBI's forward book swelled from o/s longs of $ 47.38 bn in Jan 2021 to $ 72.75 bn in March 2021. In 2022, a similar pattern was observed where the book swelled from $ 50bn in Jan to $ 66 bn in March 2022.  The above data leans towards a pay on dips strategy. Interest Rate differentials are the primary drivers of FX Swaps with other factors like system liquidity, intervention, econ...

Bank of Japan made no changes to the Yield curve control policy. It kept the band at +/-  0.50% and amended the rules for a fund supply market operation. Under the amended rules, BoJ can offer funds upto 10 years against collateral to financial institutions for both fixed and variable rate loans.  Post the announcement, JGBs yields quickly fell to lows of 0.36%. I anticipated JPY to depreciate after a pull back on the sharp fall in yields but nah nah nah.. JPY completely reversed course.  The price development only goes to show that the market anticipates YCC to likely end in march which is the last policy announcement by Governor Kuroda before the end of his term. The inflation data released today further emboldens the expectation. Japan's core consumer prices in December rose 4.0% from a year earlier, double the central bank's 2% target, hitting a fresh 41-year high. Dates ( according to Reuters) 10th Feb - Present nomineed to Parliament 16-17th Feb - hea...

If you personalize losses, you can't trade. It is important to know the probability of your wins so when you loose , take comfort in knowing that you will make money only x % of the time. Initial Jobless Claims came in for the week ending Jan 14 decreased by 15,000 to 190,000 and Continuing jobless claims for the week ending Jan 7 increased by 17,000 to 1.647 million. The employment data has been resilient.  Dec total housing starts declined 1.4% mom in December to 1.382 million units while total building permits declined 1.6% mom to 1.330 million. High mortgage rates are biting into spends on housing as can be seen in the chart below. Remember, we are seeing goods disinflation and due to the construction of the shelter component of CPI, shelter inflation will also start coming off from Q2, the services excluding shelter component could be sticky.  What is important here to understand is - there is divergence in the embedded market pricing of Fed Funds rate and Fed's proj...

The BoJ amended the rules for a fund supply market operation to use it as a new tool to prevent long term interest rates from rising too much. Under the amended rules, BoJ can offer funds upto 10 years against collateral to financial institutions for both fixed and variable rate loans .  What is Fund supply operations against pooled collateral?  Also known as open market operations, are a monetary policy tool used by central banks to control the money supply in an economy. In these operations, the central bank provides funds to commercial banks in exchange for a collateral, such as government bonds. The central bank can use these operations to increase or decrease the money supply in the economy, depending on its monetary policy goals.  Financial institutions can therefore buy say 10Y JGBs at 0.50% and use it as a collateral to borrow funds from BoJ. This would keep the yield on JGBs. The BoJ simultaneously announced that it will offer 5 years loans under the fund supply...

Good morning !! The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless. BoJ monetary policy meeting kept the yield curve unchanged at +/- 50 bps. It is the only Central Bank that has a NIRP (Negative Interest Rate Policy). The bank will continue with its current monetary policy of maintaining its short-term interest rate at minus 0.1% and its long-term interest rate around 0%. The Bank will offer to purchase 10Y JGBs at 0.50% every business day through fixed rate purchase operations unless it is highly likely no bids will be submitted. You may revisit the earlier decision  here . Earlier local media reports suggested that policymakers will be looking to review the side effects of current ultra-easy monetary policy and potential risks following the December move. This had lead to consternation among the market participants with market opinion widely divided between status quo / widening of the band / abandonment of YCC policy....

WPI inflation peaked appears to have peaked in May - June 2022 from highs of 16.68% to most recently released figure of 4.95%. This is the lowest print since March 2021. The decline was broad based but the primary articles saw a mom decline of 2.98% followed by fuel and power at -1% and the manufactured products basket falling 0.28% mom. On a yoy basis, fuel and power which has a weight of 13.2% in the WPI basket is up 18% yoy.  The recent decline in WPI confirms the goods disinflation narrative while the stickiness of the core persists (earlier  CPI ) While OIS continues to respect the range established earlier: 1Y OIS Range 6.55% - 6.75%, level 6.69% 5Y OIS Range 6.15/20% - 6.50%, level 6.25% 1x5 OIS spread has widened to - 44 bps from early dec lows of 43 bps.

“Time is your friend; impulse is your enemy.” - John Bogle India released the trade deficit data.  December merchandise trade deficit came in at $ 23.76 bn (prev month $ 23.89 bn) with mom exports growing at 8% , current $ 34.48 bn, prev month $ 31.99 bn and mom inports growing 4% , current month $ 58.24 bn , prev month $ 55.88 bn. On the services side , exports rose 4% mom to $ 27.34 bn while imports rose 16% mom to $ 15.56 bn. Dec services exports and imports held steady above the Apr - Dec 2022 mean of $ 26 bn and $ 15 bn.  On the aggregate, trade deficit ( merchandise + services ) stands at $ 118 bn which is a significant deterioration from the deficit of $ 57.26 bn for the corresponding period in 2021. The transfers and income surplus for H1 22 - 23 stood at $ 26 bn, extrapolating the same, transfer and income surplus is estimated at $ 13 bn. Q3 merchandise trade deficit is est at $ 74.5 bn while services surplus is est at $ 36.85 bn. Invisibles (services + income + tr...

The Release : December CPI -0.1% (Exp 0.0%); Core CPI 0.3% (exp 0.3%); Prior 0.2%. The index for gasoline was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes. The shelter index continued to increase, rising 0.8 percent over the month. The rent index rose 0.8 percent over the month, and the owners' equivalent rent index also rose 0.8 percent. The index for lodging away from home increased 1.5 percent in December, after falling 0.7 percent in November.  Small note for those who may have missed why the calculation methodologies of the shelter component of the CPI make it a lagging indicator: Shelter inflation is a major driver of the CPI index. Housing represents about a third of the value of the baskets of goods that the Bureau of Labor Statistics (BLS) examines when preparing the Consumer Price Index. For renters, shelter inflation measures both rent and utility payments. For homeowners, the BLS calculates imputed r...

Inflation print comes lower than expected India Dec CPI came in lower than consensus estimates with prices rising 5.72% yoy (exp 5.88% CPI est ). The print lower was driven by disinflation in food and beverages where prices fell 1.35% mom. However, the core component, CPI excl f&b and fuels & lighting, continues to be sticky at 6.10%.  Prices slowed for food (4.19% vs 4.67%), pushed down by a 15.1% fall in vegetables; clothing and footwear (9.58% vs 9.83%); and housing (4.47% vs 4.57%). On the other hand, prices rose faster for fuel and light (10.97% vs 10.62%), pan, tobacco, and intoxicants (2.55% vs 2.02%), and miscellaneous (6.17% vs 6.07%) * The 5.7% Dec print , alters the Q4 FY 23 inflation trajectory to an average of 5.36%.  RBI projects CPI inflation for Q1:2023-24 at 5.0 per cent and for Q2 at 5.4 per cent.  The current disinflation is encouraging but the core component continues to be sticky. RBI may hike repo rate by 25 bps in the forthcoming policy...

We booked profits on our USDINR short position and stand neutral. The move lower in USDINR came alongside a surge in volume.  After the long consolidation between 82.60 - 82.90, reckon buyers got trapped and then the sharp move lower along with surge in volume suggests big unwinding of positions / initiation of fresh shorts. Yesterday, intraday volume data shows buying interests between the 82.50 - 82.60 zone. We are neutral on the pair ahead of the  CPI Data . Market is positioned for a peak in the CPI inflation numbers and the same can be seen in the lower US yields with 2Y back to price resistance at 4.20% yield and 5Y back to price resistance at 3.52% yield. Taking cues from offshore markets, India Gsec yields are also trading lower and OIS is also tad bit lower. 1Y OIS continues to be rangebound b/w 6.55% - 6.75% and 5Y OIS has seen multiple rejections at the 6.50% level with support coming in at 6.20%. We are neutral on forwards and OIS at the current levels. In another ...

CPI Inflation estimates  India will release the Dec inflation number on 12th Jan and the market consensus is for a reading of 5.88%. My own estimates are for the Dec print at 5.91%. The next quarter trajectory is seen at an average of 5.52% with 5.93% (Jan), 5.69% (Feb) and 4.92% (Mar). While the headline print will be important, the core component will be even more crucial which has been holding at 6% since the last quarter. The decline in the Nov print to 5.84% was largely driven by food disinflation. Milk and cereal prices which account for 16.28% of the basket have seen an increase in December while vegetable prices have seen disinflation. Refer to the summary  Daily items .  The economist estimates range from 5.70% - 6.10%. A print closer to 5.50% alters the future trajectory of inflation and interest rates likewise. US Headline inflation is expected to rise 6.5% yoy, flat mom. US inflation appears to have peaked in the month of June 9.10% and is seen steadily declin...

 “We do today what they won’t, so tomorrow we can accomplish what they can’t.” – Dwayne ‘The Rock’ Johnson Morning !!  USDINR trade is performing well. Current market price is 81.72 and a 1.50% return is pretty fantastic so we look to close out the position on a trailing SL basis at 81.85. Let me explain the rationale here. The pair has been holding the 81.70 support level and 81.85 resistance level since open. So if we take out the highs of the day, we square and look for better spots to re-initiate the position. The run down has been sharp so taking profit seems logical. However, we square off the position at the 81.55 - 81.60 zone. We have the US CPI data and India CPI data due to release tomorrow and position adjustment could see USD strengthen. On the OIS front, 1Y OIS has been pretty range bound 6.55% - 6.75% with market pricing in 25 bps hike in the Feb 23 policy and is divided on the possibility of a 25 bps hike in the Apr policy. There are no fresh catalysts to guide ...

Mirabeau's dictum: Be bold, still be bold; always be bold. Following up on the article I wrote earlier on the necessity of visualizing the possible paths the currency could take helps control risk. It is important to make an hypothesis but being prepared for everything else is more important.  What I have found particularly useful while trading intraday is not to buy into supports if I observe certain price action when the market momentum is lower even though other asset classes are pointing me in a different direction. What is this price action I'm looking for ? The pair gets sold on day T-1 and selling continues into the post market hours. On day T, pair opens gap down or right below T-1 day support, selling pressure persists into the pre-open and open , chances are we have a trend day if the market momentum is downward. I define them as gap and go trades. If I see this kind of price action, after the initial dip, I like to wait for a retracement and then pile into shorts and...

 Make it a point to read the below article from Economic Times. The FPO is likely to be launched later this month and could be the tailwind for USDINR momentum lower. Adani FPO $ 2.5bn

 “Rule your mind or it will rule you. ” – Horace Goodmorning fellas !! Let's take a quick look at the markets. Overnight developments -  According to Bloomberg, Atlanta Fed President Bostic said that the Fed is willing to overshoot when it comes to tightening, adding that the Fed should hold rates at 5% for a "long time". Fed's Bostic is not an FOMC voter. Fed is guiding the markets pricing for US terminal rates higher through comments but there is growing consensus on the US disinflation narrative and the looming recessionary risks. This is where there is divergence between the outlined Fed policy path and market rate hike expectations. Fed statement of economic projections outline terminal fed fund rate of 5.10% through 2023 while market is pricing in a policy pivot post June 23 with around 50 bps of rate cuts priced in by Dec 2023.  China removes all border restrictions Chatter of another sales tax hike in Japan Tokyo CPI released today morning showed CPI excluding...

“You have power over your mind, not outside events.  Realize this, and you will find strength.” US NFP Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance. Average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents, or 0.3 percent, to $32.82. Over the past 12 months, average hourly earnings have increased by 4.6 percent.  Average hourly earnings offered a welcome moderation. USD declined as market positioning shifted to a 75% probability of a 25 bps hike in the Feb 1 policy. DXY declined 1.65% to a low of 103.87.USDINR traded a low of 82.27 after the market hours. China Reopening The big news over the weekend has been China re-opening to the world after 3 years of isolation as it followed a zero covid policy. Deep declines are see...

"We must all suffer one of 2 things: the pain of discipline or the pain of regret" GoI released the advanced FY 22- 23 GDP estimates.  According to the first advance estimates released by the government, India's GDP may grow 7% for financial year 2022-23. Nominal GDP is estimated at ₹273.08 lakh crore, as against the Provisional Estimate of GDP for the year 2021-22 of ₹236.65 lakh crore. The nominal GDP growth for FY23 is estimated at 15.4% as against 19.5% in FY22. The key take away from the advance estimate release is higher nominal GDP growth gives cushion to the government towards an additional spending of 97K crore while retaining the fiscal deficit at 6.44%.  GoI efforts towards fiscal consolidation aim to bring fiscal deficit at 4.5% of GDP by FY26 which entails a 190 bps reduction in fiscal deficit over 3 years. This implies a 65 bps reduction with fiscal deficit at 5.80% could be targeted for the FY 24 budget.

"Discipline is choosing between what you want now and what you want most" - Abraham Lincoln Data releases: Strong US ADP employment numbers and the low level of initial jobless claims boosted the usd index overnight.  According to the Dec ADP employment report, private-sector employment rose 235,000 well above expectations of 150,000. Annual pay for “job-stayers” rose 7.3%. US New jobless claims came in below estimates at 204k (exp. 225k). Meanwhile US Continued Jobless Claims came in at 1.694M (exp. 1.708M). November trade deficit narrowed to $61.5 billion, lowest since September 2020 on a decline in both exports and imports as global demand weakened.  A strong ADP employment report adds to the expectation of a stronger NFP print due to be released today (exp 200k, u/r 3.70%, wage growth 0.40% mom). Initial jobless claims are a leading indicator and the low level of claims goes to show the tightness of the labor market. Labor market tightness fuels concerns that the Fed migh...

Minutes of the  FOMC Rate Decision  were released last night. The minutes did not offer anything surprising.  Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy. Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Market pricing for Fed Funds rate is dovish than the statement of economic projections which expects Fed funds rate in 2023 at 5.10%. US Yields closed as 2Y at 4.355% and 10Y at 3.686% with 2x10 spread at 67 bps US Mfg PMI dipped for the s...

Let's quickly run through some of the things I picked up over the last week Release of H2 Balance of Payment data 1. India reported a BoP deficit of $ 30.38 bn for Q2 ( $ 4.6 bn surplus for Q1). H1 BoP is at $ 25.78 bn.  Current account = Merchandise + Invisibles ( Services + Transfers + Income)                                 = - 147              + 92             ( 65          + 48            - 21         )                                 = - 55 bn $  Capital Account = Foreign Investment + Loans + Banking Capital + Rupee Debt Service + Other Capital                        ...

 Happy New Year to everyone !!  To skillfully manage your mind is the most important gift to self.  Fear of the unknown is one such matter of the mind but a person who can develop a process, think probabilistically, analyze the outcome and use the analysis to refine the process will gain a quiet confidence to overcome the fear. For 2023, I wish for everyone to think more deeply about the self to truly unleash your potential.