Making Sense

Fed Fund Futures implied interest rate pricing closed the week at 32 bps of rate cuts priced into from 43 bps cuts seen at the start of the week. Also making the headline was Goldman Sachs changing it's Fed cut call to September. The street is now divided for the first rate cut between September and December policy meetings. I still think there is more legroom before we start thinking if the FFR pricing is rich . The Us2s10s Curve bear flattened 7.40 bps.  Governor Waller's speech "Some Thoughts on r*" is an interesting one and a recommend reading as he looks at factors affecting  r* from the lens of supply and demand and contributing factors that led to the decline of r*. He then goes on to delve into factors that could have reversed to explain if r* has moved higher in the current environment.  S&P Flash PMIs showed US Global Composite PMI at a 25 month high and Services PMI at 12 month high while the Mfg PMI showed an overall improvement in business conditions....

"I think a life properly lived is just learn, learn, learn all the time" US Treasury Curve bull steepened overnight on dovish comments from an otherwise hawkish FOMC member Christopher J. Waller, DXY plummeted and Gold prices after being capped at $ 2000 since October finally broke out higher to trade a high of $ 2043. In his speech titled "something appears to be giving, and it's the pace of the economy", Mr. Waller commented that economic growth has moderated and that is more in keeping with progress on lowering inflation. Fed Reserve Board Member Waller said " I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent. That said, there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough to achieve price stability. But the recent loosening of financial conditions is a reminder that many factors can affect these co...

Too much to catch up on after the long hiatus.. A lot of travel and a lot of celebration as I attended a Close Relatives wedding and celebrated my 40th Birthday. My personal life over the last week mirrored the Risk on moves in Financial Markets. Loved every bit of it and felt overwhelmed by all the family love. Coming back to markets now.... "It's only when the tide goes out that you find out who's been swimming naked" ~ Warren Buffett U.S Economic data for Oct pointed to a soft landing narrative. U.S CPI came in at 0.0%, prior 0.4%; Core CPI 0.2%, Prior 0.3%; PPI -0.5% , prior revised lower to 0.4%; Core  PPI 0.0%, prior was revised to 0.2%. Retail Sales came in at -0.1% , prior was revised higher to 0.9% from 0.7%; ex-auto came in 0.1% , prior was revised to 0.8% from 0.6%. Initial Jobless Claims came in at 231K and Weekly Continuing Claims came in at 1.865 mln.   Recap of moves in UST over the last week below:  USTs High Low      Close WoW...

Recapping the last week's price action,  Risk sentiment deteriorated in the immediate aftermath of the Israel-Hamas Conflict at the start of the week but improved on Fed Speak. Higher UST yields and as a consequence tighter financial conditions were seen by Fed Members as having done the job for Federal Reserve and the suggestion that the narrative should shift from how high to how long supported the risk sentiment before the strong US CPI data and resumption in crude oil price rally dented the sentiment again. The extremely fluid geo-political situation and how the war escalates and embroils other nations will continue to weigh on the market sentiment.  The week ahead is light on data. India only releases the WPI data today while US releases Retail Sales / Industrial production / Building Permits / Jobless Claims / Home Sales data coupled with Fed Speak. Keep a close watch on the Fed Chair Jerome Powell's Speech on Thursday before the start of the blackout period ahead of the...

"Daily habits forge your identity" US stocks made broad gains and USD downside momentum held into yesterday's close on Fed speak. Market sentiment was also lifted on reports that China is considering fresh stimulus measures to the tune of CNY 1 trn ( USD 137 bn). Comments from Federal Reserve member Logan "If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate". The same message was echoed from other Fed speakers - Bostic, Kashkari and Waller. Crude oil prices and Gold prices closed the day at the highs on the Israel - Hamas conflict. The markets continued to push the Dec 24 FFR pricing lower to 4.51% from 4.55% the prior day. There is significant divergence between the Fed's guided path (5.10%) and the current implied market pricing.  For the day, we have the US PPI release and FOMC meeting minutes and the more important CPI data tomorrow. On the domestic front, USDINR continued to be ...

Oil prices climb as OPEC+ members led by Saudi Arabia announced today a series of “voluntary” oil production cuts. Brent crude prices are up 1.60% at 79.73 and USDINR is expected to gap up at open closer to 82.32 levels. The Canadian dollar, beneficiary of higher oil prices gapped down at open at 1.3489 but has since found buyers in the Asian session to trade at 1.3507. The cuts will go into effect in May and remain in place until the end of 2023.   The following output cuts have been announced: 1.       Saudi Arabia 500,000 bpd 2.       The UAE 144,000 bpd 3.       Iraq 211,000 bpd 4.       Kuwait 128,000 bpd 5.       Algeria 48,000 bpd 6.       Oman 40,000 bpd 7.       Kazakhstan 78,000 bpd 8.       Gabon 8,000 bpd 9.       Moscow will extend its previo...

After the tumultuous Asian Session yesterday, risk sentiment stabilized overnight as markets took comfort  in the  spate of liquidity measures announced by CBs media reports of  U.S. Treasury Department staff studying if federal regulators have enough emergency authority to insure deposits above the current $250,000 cap on accounts without the consent of Congress  and most recently Tsy Secretary Janet Yellen comments " US aggregate deposit outflows from Regional Banks have stabilised. Tsy, Fed, FDIC actiions reduced risk of further bank failures that would have imposed losses on Deposit insurance fund. Similar actions to protect Depositors could be warranted if smaller institutions suffer deposit runs that pose risk of contagion" Sharp moves were seen across Rates. After the sharp dip in rates on write off of AT1 bonds by Credit Suisse, USD bonds pulled back.  For Domestic markets, RBI injected liquidity through the LAF window to the tune of 79K crore on 20 Mar ...

  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 difference between try and triumph is just a little umph!" Q3FY23 Real GDP grew 4.40% yoy lower than consensus estimates of 4.60% following an upward revision of 80 bps to FY 21 to -5.80% (previous est -6.60%) and 40 bps to FY 22 to 9.10% (previous est 8.70%). India's GDP during 2022-23 is estimated to grow at 7.0 %. RBI had projected the real GDP growth for 2022-23 at 6.8 %, with the third quarter and fourth quarter growth at 4.4 % and 4.2 %, respectively. S&P Global Manufacturing PMI expanded for the 20 th straight month with the February reading coming in at 55.3. Input cost inflation accelerated to a four-month high but there was a softer upturn in selling charges. Recent data shows waning momentum after the Dec peak of 57.20. The Conference Board Consumer Confidence Index decreased in February for the second consecutive month to 102.9 down from 106.0 in January. The Present Situation Index—based on consumers’ assessment of current business and labor ...

 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 ...

 India released the Merchandise + Services Trade data on 15th Feb 2023.  The trade data showed a welcome moderation. The merchandise trade deficit came in at $ 17.75 bn, lowest since Jan 2022 and the services surplus posted a record surplus of $ 16.48 bn. Overall trade balance recorded a net outflow of $ 1.27 bn.  It appears the worst is behind and the services sector outperformance has helped bridge the merchandise trade gap. On a FYTD basis, we are running a Merchandise + Services Trade deficit of $ 112 bn. Broad USD strength on the back of strong NFP print / CPI print and Retail Sales data (released today showed headline Retail Sales rose 3% mom following a 1.10% mom contraction in dec) is likely to weigh on the INR.  Positive surprise on trade data and stable FPI flows so far in Feb along side INR at the top of the support zone of 83.00 have me biased to short USDINR with stops above 83.20. But I'd wait for the USD to turn before establishing any meaningful short...

"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...

 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...

 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...

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...

 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