Multi-Asset Weekly Newsletter

Warsh sounds hawkish, says Fed committed to taming inflation

Global Development: 

Fed chair Warsh sounded hawkish in his speech at annual Jackson Hole symposium. This drove US yields and Dollar higher

Trump said US had struck a deal with Venezuela wherein it would control a large part of Venezuelan oil Reserves. US would control 55% of the effective output and from the JV and obtain the oil at cost

Earlier in the week reports of Iran and Oman making some progress on passage through the SoH had reduced risk premium a bit and caused Brent to slip below USD 90 per barrel.

Possibility of RBI sucking out excess Rupee liquidity from banking system through ICRR (Incremental CRR) dampened sentiment a bit in bond markets. RBI continues a draw a line for USDINR at 95.80 for now it seems.

Foreign Exchange: 

• The dollar strengthened broadly against all G10 currencies, with SEK (-1.4%), CHF and CAD (-1.0% each) among the biggest decliners, while AUD (-0.1%) was the most resilient.
• EURUSD declined 0.8% this week as the dollar strengthened broadly, with markets reassessing the outlook for US rates and global monetary policy.
• GBPUSD fell 0.8% this week amid broad-based dollar strength, while expectations around the Fed and Bank of England remained key drivers for the pair.
• Asian currencies were mixed against the dollar, with KRW and TWD gaining 0.8% each, while PHP (-1.0%) and THB (-0.8%) recorded the sharpest declines; INR strengthened 0.3%.
• Rupee traded a 95.32-95.75 range this week and ended at 95.38 compared to previous close of 95.70.
• Implied annualized forward yields rose gradually across tenors, from 2.66% at 1M to 3.15% at 5Y, with the curve broadly upward sloping.
• 3m ATMF onshore implied volatility is at 4.15%.
• FX Reserves rose USD 12.4bn to USD 729.3bn in week ending 21st August.

Fixed Income: 

• 10Y yields were broadly higher this week, led by Australia (+8bps) and Japan (+5bps), while South Korea (-7bps) saw the sharpest decline; US yields rose 2bps to 4.72%.
• Yield on the domestic 10y benchmark traded a 6.84-6.92% range this week and ended at 6.91% compared to previous close of 6.85%.
• Banking system liquidity is in surplus of more than Rs 4 lakh crs. Overnight call rate fixings happened in 5.22-5.24% range this week.
• 1y OIS rose 3bps to 5.95% this week. 5y OIS ended 2bps lower at 6.44% this week. 1y T-bill is at 5.80% while 1y A1+ CD is at 7.25%. 1y A1+ NBFC CP is around 7.7%.
• 10y AAA PSU is at 7.67% while 10y LIC is at 7.87%.
• FPIs have pulled out net USD 400mn from domestic bonds in August so far.

Commodities: 

Crude and precious metals declined sharply, with WTI and Brent falling 4.2% and 6.7%, while gold and silver dropped 3.2% and 3.8%; natural gas and base metals remained largely stable.

Our Views: What we like?

FX : After having sold off last week, Dollar rebounded this week against majors on Warsh's hawkish comments. We believe we are still operating in ranges and expect Dollar to be steady against majors. We see the Rupee underperforming among EM currencies on crude vulnerabilities. We expect RBI to put a firm floor under USDINR pair and do not see runaway appreciation. Exporters are advised to hedge cautiously only to extent of in-hand orders and through participating structures while importers are advised to hedge on any dips.

Fixed Income : Despite US treasury attempts to contain long term bond yields, there has not been much impact. We believe the market may test US treasury resolve. Domestically too, possibility of RBI sucking excess liquidity on more durable basis through Incremental CRR has dampened sentiment a bit. We are inching towards upper band of the 6.75-6.95% range we were seeing over next few weeks.

Commodities : We are bullish on base metals and precious metals and prefer adding exposure to these on dips. Energy prices are expected to be headline driven.