Multi-Asset Weekly Newsletter

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

Weekly Developments:

• RBI cut the repo rate by 25 bps to 5.25% (unanimous vote); stance maintained as neutral. 
• One MPC member voted to shift stance to accommodative. 
• OMO purchase of ₹1 lakh crore announced for December to inject liquidity. 
• USD 5 bn Buy-Sell swap (3-year tenor) scheduled for December, adding ₹45,000 crore liquidity. 
• Growth remains RBI’s priority amid benign headline and core inflation. 
• The buy-sell swap indicates that the RBI is offsetting spot USD sales used earlier to curb rupee depreciation. 
• Ample liquidity is expected to aid policy transmission. 
• Upcoming focus: US Fed policy; 25 bps rate cut widely expected. 

Foreign Exchange: 

• Most G10 currencies strengthened against the dollar this week, led by AUD (+1.4%), CAD (+1.2%), and NZD (+0.7%). European currencies saw modest gains, with GBP (+0.7%), JPY (+0.6%), SEK (+0.5%), EUR/DKK (+0.4%), and NOK (+0.2%) inching higher. CHF (-0.1%) was the only laggard, posting a slight decline. 
• The Euro’s modest 0.4% gain reflects a softer USD backdrop, but lingering Eurozone growth concerns continue to cap upside 
• Sterling’s 0.7% rise signals resilient UK data and improving risk sentiment, keeping GBP supported against broad USD weakness. 
• Asian currencies were mixed this week, with MYR, TWD, and THB leading gains at +0.5%, followed by modest upticks in IDR and SGD (+0.1%). CNH and HKD were flat, while KRW (-0.3%), PHP (-0.5%), and INR (-0.6%) underperformed, with the Indian rupee emerging as the weakest in the region. 
• Rupee continued to underperform its Asian peers and breached the psychological level of 90 to hit an all-time low of 90.42 against the Dollar this week. 
• Rupee traded in a 89.46-90.42 range this week and ended at 89.99 
• The RBI seems to be following a light-touch intervention approach instead of a 'line in the sand' kind of heavy-handed approach. 
• The implied yield curve shows a mild downward bias in the near term, with 1–12 month forwards easing from 2.90% to 2.47%. However, beyond one year, the curve turns upward, with yields rising steadily to 3.30% at the 5-year point. 
• Near-term forwards rose on Dollar glut, while far forwards came off on the Buy-Sell swap announcement. 3y forward yield dropped 16bps on Friday as a result of swap announcement. 
• 3m ATMF implied volatility continues to remain relatively well-behaved at 3.95%.

Fixed Income: 

US 2y and 10y yields rose 3bps and 5bps respectively this week to 3.56% and 4.13%

10y yields across the Eurozone rose 2-4bps this week

10y JGB yield rose 8bps to 1.93%

Yield on the benchmark 10y traded a 6.45-6.54% range and ended at 6.50%, just 1bp lower than last week's close.

The 5 bps initial drop post-OMO announcement quickly faded.

RBI said that it would not buy SDLs as part of OMO purchases.

1y OIS dropped 3bps to 5.43% while 5y OIS rose 3bps this week to 5.79%. Banking system liquidity is in surplus of more than Rs 2 lakh crs.

10y AAA PSU Spread over Gsec is 50bps and that of 10y NBFC is 85bps. 

Commodities: 

• Major commodities saw mixed movement this week, with Brent (+0.9%), natural gas (+9%), aluminium (+1%), copper (+3.9%), and silver (+3.3%) gaining, while gold dipped (-1%). 
• Silver and Copper continue to rally. Weak Dollar and Fed cut expectations are helping the commodity complex. 

Option Structures for Exporter-Importer 

Exporter Enhanced Collar: 
Spot ref 90.00
Tenor 6m
Fwd level 91.16
Buy put 91
Sell call 91.16 with eki at 92.20
Net zero cost 

Importer Seagull: 
Spot ref 90.00
Tenor 3m
Buy call Atmf (90.57)
Sell put 89.60
Sell call 92.00
Net cost 10 ps

 

Our Views: What we like? 

FX: We believe the Fed policy will be the last major trigger for the year. After that, the liquidity will start thinning out till year-end. The dollar is likely to continue trading with a weakening bias against majors. We expect the Rupee to consolidate in the 89.40-90.40 range for some time. The momentum on the upside is likely to reduce. 

Fixed Income: Yield on the benchmark 10y is likely to continue trading in the 6.45-6.60% range. 10y SDLs and NBFC papers are offering attractive yield pick up. 5y OIS is likely to trade a 5.65-5.85% range broadly, with moves to either side giving a good trading opportunity. 

Commodities: We expect base metals to continue to rally on a weaker Dollar and amid positive risk sentiment. Gold may see some profit-taking, while momentum in Silver will likely push it higher to new all-time highs. Brent is likely to trade sideways in the USD 58.5-65.5 per barrel range.