Multi-Asset Weekly Newsletter

RUPEE HITS NEW ALL-TIME LOWS AS RBI GIVES UP DEFENCE OF 88.80

US Developments:

• Risk sentiment weakened earlier in the week as expectations of a December Fed rate cut faded. Risk sentiment weakened earlier in the week as expectations of a December Fed rate cut faded. 
• Market participants trimmed bets following stronger data and cautious Fed communication. 
• Sentiment reversed on Friday after Fed member Williams signaled room for a near-term rate cut amid softening labor market conditions. 
• OIS-implied probability of a December cut fell to 35% before his remarks. 
• Post-commentary, the probability jumped sharply to around 75% by week’s end. 

Foreign Exchange: 

• The dollar strengthened against G10 and EM currencies this week as expectations of a Fed rate cut in December had retreated on stronger-than-expected US data, hawkish FOMC minutes, and hawkish Fed speak. 
• Most G10 currencies weakened against the Dollar this week, with commodity-linked and European FX leading the declines, while traditional safe-havens also came under broad pressure. 
• Most Asian currencies weakened against the Dollar this week, with PHP and IDR holding relatively steady while KRW, JPY and TWD led the declines, followed by softer moves across INR, SGD, MYR and THB. 
• The rupee traded between 88.42 and 89.54 and ended the week at 89.49. Rupee hit fresh all-time lows as RBI gave up defence of 88.80, a level that it had been protecting vehemently for quite some time. It may have opted to do so given the broad Dollar strength. Lack of any concrete developments on the India-US trade deal front also weighed on sentiment. Once 88.80 broke, massive stop losses got triggered, and there was almost a vertical move in USDINR 
• The forward curve continues to slope upward, indicating a steady rise in implied funding/hedging costs from the near term to longer maturities, reflecting market expectations of gradually higher rates ahead. 
• 3m ATMF implied volatility rose 35bps to 3.98% as the Rupee broke through 88.80 
• Following Friday's move, the Rupee has now weakened to 12.60 against the Chinese Yuan. 

Fixed Income: 

• US 2y treasury yield dropped 10bps to 3.51% this week, while US 10y treasury yield dropped 8bps this week to end at 4.06%. 
• 10-year yields across the Eurozone and UK changed by anywhere between -1 to +2bps. Yield on the 10y JGB rose 4bps to 1.77%, the highest level since 2007. 
• Yield on the domestic 10y benchmark traded a 6.47-6.52% range and ended the week at 6.52%, compared to last week's close of 6.49%. Yields spiked 4bps on Friday itself. 
• 1y OIS ended almost flat at 5.475% while 5y OIS rose 4bps to 5.77%. Overnight MIBOR fixings happened in a 5.43- 5.59% range this week. Banking system liquidity is in surplus of around Rs 1.75 lakh crores 
• Spread of 10y AAA PSU over Gsec is about 43bps, and that of 10y AAA NBFC is around 73bps 
• 1y T-bill is at 5.55% and 1y CD is at 6.39% 
• FPIs have bought net USD 600mn of domestic debt in November so far. 

Commodities: 

• Major commodities posted a broadly softer performance this week, with energy showing mixed moves while base and precious metals largely trended lower, signalling continued caution across global commodity markets. 
• The US pushing ahead with the Russia-Ukraine peace plan weighed on Brent. 
• Overall, a stronger Dollar weighed on commodities in general this week. 

Option Structures for Exporter-Importer 

EXPORTER PLAIN VANILLA BUY PUT

Spot ref 89.49
Buy Put ATMS(89.49) @ 57 ps
Tenor 3M
ATMF level 89.93

IMPORTER BUY OTMF CALL 

Spot ref 89.49
Buy call of 90 @ 73 ps
Tenor 3M
ATMF level 89.93 

Our Views: What we like? 

FX: Broad Dollar continues to remain in a range. We are close to the lower end of the range in EUR, GBP, and AUD. However, we expect ranges to hold into year-end. RBI likely gave up the defence of 88.80, considering broad Dollar strength and the fact that it was already short substantially in forwards. It may have thought it prudent to let the Rupee range shift higher instead of exhausting further ammunition at 88.80 itself. We expect the range in the Rupee to shift higher. We may now be in an 88.80-90 range for the next few weeks. We do not expect a runaway move higher unless there is negative news on the trade deal front. The rupee is likely to depreciate in a staircase-like manner with adjustments like the one we saw yesterday, followed by prolonged periods of range-bound price action. 

Fixed Income: We expect the yield on the domestic 10y benchmark to trade in a 6.45-6.60% range. Any uptick towards 6.60% is a good opportunity to add duration to the portfolio. We had been highlighting that paying 5y OIS around 5.65% was attractive. It has moved higher to 5.77%. Around 5.85-5.90% would be good levels to exit.

Commodities: We continue to be buyers of precious Metals on dips. We are also upbeat on Base Metals. Brent is likely to continue to remain range-bound in USD 58-70 in our view