Making Sense

"Resilience is the capacity to recover quickly from difficulties; toughness. It is the ability to bounce back from adversity and to keep moving forward towards your goals, despite the obstacles in your path" Yesterday, ECB raised rates by 50 bps as inflation continues to be elevated. Euro area Feb inflation is pretty elevated with inflation running at a hot 8.5%. Acc. to the monetary policy statement, the policy decision will be informed by a data dependent approach which will be guided by three factors: 1. The inflation outlook based on incoming economic and financial data (development in the financial markets, financing, financial cost, terms and conditions and the financing of the economy at large) 2. The dynamics of inflation 3. The strength of monetary policy transmission On the current banking sector stress, ECB expressed confidence that t he euro area banking sector is resilient, with strong capital and liquidity positions and limited exposures to the US institutions....

  Quick wrap on the market moves in the Asian Session: USDINR touched a low of 81.63 on Monday and caught a bid towards the end of the session as risk sentiment deteriorated. Today, trading in USDINR has opened with a gap up on hawkish remarks from the Federal Reserve Chairman. Balance 25% holdings were squared on the gap up. Next crucial resistance for the pair is 82.30. Domestic equity markets are trading in the red with Nifty at 17700, down 0.30% and is seen facing resistance at the 17770 level .  India  Money market operations (figures in bracket show prev day closing numbers) LAF absorption                     -49,000 crores (-61,000 crs) O/S Repo                                  +89,000 crore (+86000 crs) SDF+MSF                       ...

"The goal of a successful trader is to make the best trades. Money is secondary." Quick wrap on the market moves at the start of Asian Session: USDINR is in a strong momentum lower and part of the position was squared off  . Follow the momentum !! 81.75 is an important support but the move could very well stretch to 81.50 or 81.02. We need to look for price action to confirm a reversal trade. Patience !! Patience !! Domestic equity markets are trading in the green with Nifty at 17788, up 1.1% after failing to break the 200 DMA at 17414. FPI flows have been stable with Friday number seen at $ 30 mn inflow. The Services PMI released on friday showed services activity at a 12 year high and robust GST collection of Inr 1.50 trn in the month of February. India Money market operations (figures in bracket show prev day closing numbers) LAF absorption                     -61,000 crores (-82,000 crs) O/S Repo      ...

Follow your Playbook of trades !! USDINR trade has worked beautifully. Yesterday, we did get a sideways consolidation to initiate shorts for better part of the day. The next important support is 81.75 where profits can be booked on 75% of the position.  GQG Partners on Thursday announced the completion of USD 1.87 bn secondary equity transactions in the Adani portfolio companies.  Brokerage firm Citi estimates that the increase in free float in Adani Group companies will lead to inflows b/w usd 200 – 230 mn and the possibility of a change in weightage in MSCI's May review. Services PMI at a 12 year high The S&P Global India Services PMI expanded to a 12-year high of 59.4 in in the month of February ( prior 57.2 ) showing the best improvement in new business intakes in 12 years. Input cost inflation eased to a 23-month low, while output cost inflation slowed to a 12-month low.  In the recently concluded Assembly elections in North East – Nagaland, Meghalaya and Tripura...

 The concluding remarks of the Monthly Bulletin are beautiful. It says, "In mythologies across civilisations, the sun is depicted as riding a chariot typically drawn by four horses. In Indian mythology, the sun's chariot is drawn by seven horses. The seventh horse represents dreams, aspirations and the future. It is said that even if the other six horses are injured or exhausted, the seventh horse can take the sun's chariot to it's destination" So dare to dream big and reach your destination whatever that may be. US markets were closed yesterday. Today the activity is muted with strength seen in USD index, higher US Treasury yields and domestic rates higher.  Yesterday, LAF injection stood at inr 41k crore with SDF at 105K crore and O/S Repo operations at 146K crore. WACR traded at 6.56% as liquidity tightens on GST outflows. OIS rates are about 1 - 2 bps higher / India 10Y Gsec is trading at 7.38% / Modified Mifor is 3 odd basis higher while forwards are trading ...

"Thorough preparation makes its own Luck" - As a trader, I couldn't believe in this more. We are all involved in a game where the outcome is probabilistic and that is the universal truth. But attributing the unknown to chance rather than lack of preparation is a fundamental error and sets us up for failure. Guard against failure through thorough preparation.  Know as much as you can to improve the edge and be thorough as hell. After all the satisfaction of doing it right supersedes the chance success.  Interesting moves overnight with a sharp rally in US Treasury yields on the back of a weak 30Y auction, initial jobless claims data at 196000 still suggesting a strong labor market data and sell off in equities.  US 2Y @ 4.50% ( T-1 low 4.41%) - On the 2Y we see a double bottom with a price objective of 4.48% which has been met. The next areas of support for the bond are at 4.57%, 4.61% and 4.73%. US 10Y @ 3.68% (T-1 low 3.575%) - US 10Y took support at swing low of 3.32% t...

"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.

 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...

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 .

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.

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 ...

 “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...

 “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...