US Retail Sales jump by most since march, topping forecasts
Global developments
US October retail sales came in much better than expected. Industrial Production and capacity utilization data too were encouraging. This suggests that the US is much ahead of other Developed market economies as far as recovery is concerned. The output gap has almost closed. The data has reinforced the market's belief that the Fed is behind the curve. Fed member Bullard's comments were extremely hawkish. He said that the Fed should be more hawkish and should start balance sheet runoff immediately after tapering ends (i.e. the Fed should start reducing its balance sheet size by not reinvesting when existing treasury securities mature). Strong data and hawkish comments have translated into higher US nominal yields and Dollar strength, especially against low-yielding currencies. Euro has continued its decline against the Dollar as policy divergence seems imminent. 1.1250 is the next crucial support for the Euro. High Beta commodity currencies and EM currencies too have weakened against the Dollar. The Sterling has managed to hold on to its support at 1.34 as UK economic data and BoE governor Bailey's hawkish comments caused short-term UK gilt yields to spike.
Domestic developments
Equities
The Nifty sold off towards the end of the session yesterday, ending 0.6% lower. US equity indices rose modestly overnight. Asian equities are trading in the red.
Bonds and Rates
The yield on the benchmark 10y ended a couple of basis points higher. 5y OIS too climbed 3bps to end at 5.52%. SDL cutoffs were very aggressive. Corporate bond spreads continue to remain compressed. Money market rates too have eased.
USD/INR
The Rupee spent yet another session in the 74.30-74.55 range. If broader risk sentiment stays supportive, we could see some selling pressure in USD/INR on EUR/INR, JPY/INR carry trade. Most Asian currencies are trading weaker against the Dollar. Exporters looking to book hedges beyond March-end can capitalize on the elevated forward points at the turn of the financial year (Last day March over the First day April points are currently trading around 16p for 4 days i.e. yield of around 20%). 1y forward yield rose yesterday to 4.73% and 3m ATMF vols are stable around 4.80%.
Strategy: Exporters are advised to cover on upticks towards 74.70 levels. Importers are advised to cover on dips towards 73.80 level. The 3M range for USDINR is 73.80 – 76.00 and the 6M range is 73.50 – 76.50.
Author
Abhishek Goenka
IFA Global
Mr. Abhishek Goenka is the Founder and CEO of IFA Global. He pilots the IFA Global strategic direction with a focus on relentlessly improving the existing offerings while constantly searching for the next generation of business excellence.
