Multi-Asset Weekly Newsletter

US SHUTDOWN FUELS UNCERTAINTY; RBI HOLDS RATES, EASES TRANSMISSION. 

US government shut down as Democrats and Republicans couldn't agree on a spending plan. The contentious issue has been healthcare spending. Key government services have been disrupted due to the furloughing of employees. For essential services, employees are having to work without pay. The shutdown is expected to extend at least into next week. 

US jobs report, which was due this week, did not come out on account of the shutdown. 

On the domestic front, the RBI kept rates unchanged in the policy but left the doors open for further easing. It also announced a slew of measures to facilitate transmission of rate cuts already announced and ensure credit flow to the real economy. 

• It has allowed banks to fund M&A transactions.
• Risk weight for project finance would now depend on the stage the project is at. 
• It has raised the threshold for loan against shares and IPO financing. RBI has also proposed to remove the regulatory ceiling on lending against listed debt securities. 
• It also announced measures to support exporters amid ongoing trade tensions with the US, extending the window for merchanting trade and increasing the period for mandatory conversion of balances in the EEFC account held with GIFT IBUs
• RBI will also retract a rule that discouraged banks from lending to ultra-large corporate borrowers 

Foreign Exchange: 

• The Pound outperformed the Euro this week, rising 0.6% versus the Euro’s 0.3% gain, reflecting stronger UK sentiment and fewer BoE rate cut expectations. 
• The Euro’s limited upside suggests continued caution amid sluggish Eurozone growth, keeping EUR/GBP biased lower. 
• Yen strengthened heading into today's leadership vote. The leader of Japan's ruling party, the LDP, is to be elected. 
• Most Asian currencies appreciated against the dollar this week, led by the Indonesian Rupiah (+1.2%) and Taiwan Dollar (+0.5%), while the Thai Baht (-0.5%) and Indian Rupee (-0.1%) were the only losers. 
• Rupee traded in an extremely battle range of 88.65-88.80 this week and ended at 88.78 compared to last week's close of 88.71. 3m ATMF implied vols are at 3.30%. 
• The forward premia curve is upward-sloping, rising from 2.12% (3M) to 3.14% (5Y). 
• FX Reserves dropped USD 2.3bn to USD 700.2bn in the week ending 26th September. 

Fixed Income: 
Yield on the US 2y treasury rose 4bps to 3.58%. US 10-year treasury yield ended 2bps lower at 4.12%. Change in 10 years. Yields across the UK and the Eurozone this week were anywhere between -2bps to +2bps. Yield on the domestic 10y benchmark traded a 6.50-6.61% range and ended at 6.51% compared to the previous week's close of 6.52%. Yields eased from highs after the monetary policy, as the MPC kept doors open for further accommodation. Cutoff on the new 10y benchmark yesterday came in at 6.48% 1y OIS ended the week 3bps lower at 5.43% and 5y OIS dropped 8bps to 5.66%. Banking system liquidity returned to a surplus of Rs 1.7 lakh crs. Call fixing, which was consistently happening above Repo, eased to 5.40% yesterday. 10y AAA PSU spreads are at 48bps, and 10y AAA NBFC spread is at 82bps over Gsec. FPIs bought USD 1.3bn of domestic bonds in September. In the first few sessions of Oct, they have bought USD 300mn. 

Commodities: 

• Crude has been under pressure amid expectations that OPEC+ will discuss fast-tracking a supply hike.s 
• Copper rallied on supply disruptions from Indonesia 
• Gold gained for the 7th straight week as the US government shutdown added to uncertainty.  

Option Structures for Exporter-Importer 

Importer Option Strategy (Seagull)

Spot ref 88.78
Tenor 3m
Buy call Atmf (89.25)
Sell put atmf
Sell call 90.50
Net Zero cost

Exporter Option Strategy (KIKO) 

Spot ref 88.78
Tenor 6m
Atmf 89.76
Buy put at 89.65
Sell call at 89.65 with eki at 90.60
Net Zero cost 

Our Views: What we like?  

FX: We continue to remain bearish on the Dollar, especially against majors. The dollar may not weaken as much against EM currencies. Rupee may continue to underperform amid Dollar weakness. It is likely to be used as a lever to offset the impact of tariffs.
The IFA Global Hedging barometer, unchanged at 130, indicates a moderately bearish outlook for the Rupee over the medium term (Implied range: 88.30-89.50 over the next 6 weeks). The barometer range is 36-180, with 36 indicating the peak USDINR bearishness. 

Fixed Income: Close to 6.60% levels on the 10y are attractive for adding duration to the portfolio. Current levels on 5y OIS are attractive to convert floating-rate INR exposures to fixed. 

Commodities: We continue to remain bullish on precious metals given the weak Dollar outlook and shutdown-induced uncertainty. We believe Silver may outperform Gold. We are also upbeat on base Metals. We remain neutral on Brent.