Multi-Asset Weekly Newsletter

NIFTY SIZZLES BUT THEN FIZZLES IN A HOLIDAY SHORTENED WEEK. 

The current US government shutdown is now the second-longest ever, into its 25th day. The September CPI print was delayed because of the shutdown. Both headline and core CPI prints came in a tad lower than expected at 3% yoy. It is possible that the Oct CPI print may not be released. However, with inflation gradually easing and labor market conditions weakening, we are likely to see two more cuts by the end of 2025. This would take the Fed funds rate to 3.50- 3.75% from the current 4-4.25%. In fact, the next Fed meeting is due next week itself, on Wednesday, in which the Fed is likely to cut by 25bps. The US imposed sanctions on Russian oil giants Rosneft and Lukoil, which together account for 5% of the global crude output. Trump claimed that China and India were scaling back crude purchases from Russia upon his request. Optimism around the India-US trade deal has lifted sentiment onshore, and Trump's meeting with Xi on the sidelines of the APAC summit (which could lead to a trade truce between the US and China) in South Korea next week has lifted global risk sentiment.  

Foreign Exchange 

• The Swedish Krona (+0.6%) led gains, followed by NOK (+0.5%) and NZD (+0.4%). 
• On the weaker side, GBP (-0.9%) and JPY (-1.5%) were the biggest laggards. 
• ECB policy is due on Thursday. ECB is expected to keep rates unchanged (i.e., leave the deposit facility rate unchanged at 2%). 
• INR and MYR gained slightly (+0.1%), while CNH and HKD remained flat. 
• KRW (-1.2%) and PHP (-0.8%) saw the steepest declines among Asian peers. 
• Yen was the worst performer on new PM comments on plan to run a 'responsible, proactive fiscal policy. 
• The rupee was the best-performing Asian currency in a holiday-shortened week. Rupee traded in a 87.64-87.97 range and ended at 87.85 compared to last week's close of 87.97 
• Short-term forwards range from 1.96% (1M) to 2.31% (12M). Longer tenors rise gradually, touching 3.21% for the 5-year horizon. 3m ATMF implied volatility is at 3.60% 
• FX Reserves rose USD 4.5bn in the week ending 17th Oct to USD 702.3bn, mainly on Gold revaluation. 

Fixed Income 

US 2y and 10y Yields rose 2bps this week to 3.48% and 4% respectively UK 10y yield dropped 7bps this week on the lower-than-expected inflation print in the UK, while 10y Yields in the Eurozone were up 5-7bps Yield on the domestic 10y benchmark Gsec traded a 6.49-6.56% range and ended at 6.53% compared to the previous week's close of 6.51%. 1y OIS rose 2bps to 5.45% and 5y OIS rose 3bps to 5.65%. The banking system's liquidity is close to neutral. Overnight MIBOR fixing yesterday was at 5.52%. 10y AAA PSU spread over Gsec is 52bps, and the NBFC spread is 85bps. FPIs have invested net USD 1.9bn in domestic Bonds in October so far. 

Commodities 

Gold and Silver ran into profit-taking this week after printing all-time highs. Brent spiked as the US imposed sanctions on Rosneft and Lukoil, and amid the Trump administration's claims that India and China would taper Russian crude purchases. 

Option Structures for Exporter-Importer 

Importer Option Strategy (Seagull) 

Spot ref 87.70
Tenor 3m
Buy call Atmf (88.16)
Sell put 87.50
Sell call 89.25
Net Zero cost 

Exporter Option Strategy (Enhanced collar) 

Spot ref 87.70
Tenor 6m
Fwd level 88.70
Buy put 88.50
Sell call 88.70 with eki at 89.70 

Our Views: What we like? 

FX: The dollar index is quite range-bound. The overall trend still appears to be one of Dollar weakness. Rupee now seems fairly valued, and we may see a bout of appreciation towards 87.30 if the trade deal gets sealed with the US. Otherwise, we expect it to remain range-bound in 87.60-88.30 

Fixed Income: We expect the yield on the benchmark 10y to trade in a 6.45-6.65% range. Any uptick towards 6.65% is a good opportunity to add duration to the portfolio. Current levels on 5y OIS seem attractive to pay to convert floating-rate exposures to fixed. 

Commodities: We are bullish on Brent and Copper and neutral on the precious metals, having captured a large part of this rally