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HSL PCG Currency Insight-Weekly

12 December, 2016
WEEKLY MOVEMENT MARKET WRAP UP
Rupee To Trade Volatile Ahead of Fed and Year End Outflow
In last week, rupee closed at 67.42 per US dollar, down 1.2% from last
Currency weeks close of 67.23. The rupee strengthens after central bank surprised
market with maintaining interest rate unchanged.
Currency
Last
Prev.
Chg.
% The 10-year yield climbed twenty basis points to 6.44%, the biggest
(Spot) Close Chg. since April 2014. Borrowing in dollars to purchase rupee assets has
DXY Index 101.5900 100.7700 0.8200 0.8% earned 2.8% since the end of June, the best carry-trade return in Asia,
data compiled by Bloomberg show. That was still the biggest since the
EURUSD 1.0561 1.0664 -0.0103 -1.0%
five days ended on 4 March.
GBPUSD 1.2572 1.2729 -0.0157 -1.2% Rupee would remain under pressure in coming week ahead of US and
USDJPY
BoE monetary policy meets along with domestic macro economic inflation
115.3200 113.5100 1.8100 1.6%
data. Beside foreign fund outflow, RBI has revised down countrys growth
USDINR 67.4175 68.2250 -0.8075 -1.2% for the coming quarter on demonetisation which would weigh on rupee
EURINR 71.4348 72.6424 -1.2076 -1.7% sentiment.
GBPINR 84.9701 86.0713 -1.1012 -1.3%
Dollar Gains Ahead of Highly Anticipated Fed Rate Hike
JPYINR 58.7900 59.8900 -1.1000 -1.8% The U.S. Federal Reserve gets ready for the final monetary policy
DGCX USDINR
meeting of the year, and just like last year there is a high probability of a
67.6727 68.4556 -0.7829 -1.1%
rate hike announcement. The Fed is expected to raise the benchmark
funds rate by 25 basis points. The eyes of the market will be focused on
RBI Reference Rate the economic projections from the central bank to get some insights on
next year's policy moves.
Markets were pricing in a nearly 100% chance for a quarter percentage
Prev. %
Currency Last Chg. point increase to the Fed's target range of 0.25 to 0.50%. Speculators
Close Chg.
increased positive bets on the U.S. dollar for a third straight week
USDINR 67.5840 68.3689 -0.7849 -1.1% through Dec. 6, pushing net longs to their highest since early January,
EURINR 71.7607 73.0385 -1.2778 -1.7% according to Reuters calculations and data from the Commodity Futures
Trading Commission released on Friday. The U.S. dollar index the index
GBPINR 85.1289 86.2816 -1.1527 -1.3%
was up 0.75%.to 101.60.
JPYINR 59.0600 59.9600 -0.9000 -1.5% The EUR/USD tumbled 1.23% in the last week. The single currency is
trading at 1.0541 after the ECB surprised markets with a reduction in the
QE program, while at the same time extending the deadline until the end
GOI 10 Yr. Bond Yield of the year and allowing the purchase of bonds with yields below the
deposit rate. In near-term support is in the 1.0449-1.0520 area, marked
Prev. % by a support shelf in play since mid-March 2015 and the 38.2% Fibonacci
Instrument Last Chg.
Close Chg. expansion. A daily close below that exposes the 50% level at 1.0318.
Alternatively, a reversal above the 23.6% Fib at 1.0611 targets the
697GS2026 6.4410 6.2430 0.20 3.17%
14.6% expansion at 1.0711.

PRIVATE CLIENT GROUP [PCG]


WEEK AHEAD
This week remains hectic amid series of data. In particular, the forex market will be hinges on central bank policy decision. U.S. Federal
Reserve policy makers will raise their benchmark interest rate this week for the first time in a year as the economy perks up and price
pressures slowly build, economists widely expect. While, the Bank of England is expected to keep interest rates on hold and wait for the
impact of Brexit.
Among the U.S. economic data on tap, retail sales are projected to have advanced in November, underscoring steady household demand as
unemployment shrinks and wages rise. Consumer prices probably increased last month.

Tuesday, Dec. 13
China releases data for November industrial production, retail sales and fixed-asset investment, along with energy production and property
development. The reports are expected to show further economic stability as China balances the competing goals of maintaining growth
while shifting its economy more to services from a heavy reliance on the state-owned industrial sector.
ECONOMY: U.S. NFIB small-business sentiment (Nov.), U.S. import prices (Nov.), Federal Open Market Committee begins a two-day policy
meeting on U.S. interest rates, India CPI (Nov.), U.K. inflation (Nov.)
Wednesday, Dec. 14
Members of the Federal Open Market Committee are expected to raise their overnight bank lending rate by 25 basis points at the conclusion
of a two-day meeting. U.S. central bankers will also issue their economic projections. Fed Chair Janet Yellen will hold a press conference after
the FOMC releases its statement.
ECONOMY: U.S. MBA mortgage applications (weekly), U.S. producer-price index (Nov.), U.S. industrial production (Nov.), U.S. business
inventories (Oct.); U.K. unemployment and average earnings (Oct.), euro-region industrial production (Oct.)
Thursday, Dec. 15
The Bank of Englands Monetary Policy Committee will probably keep its benchmark interest rate at a record low 0.25% and its quantitative
easing program running as currently planned. After loosening policy in August, the committee is now in a neutral stance as it assesses the
impact of the weaker pound on the economy and the outlook for inflation.
U.S. consumer prices probably increased in November, indicating inflation is moving toward the Feds goal, a Labor Department report
forecast will be released.
ECONOMY: U.S. jobless claims (weekly), U.S. current-account deficit (third quarter), Philadelphia Fed business outlook (Dec.), U.S. Empire
State manufacturing (Dec.), U.S. Markit manufacturing PMI (Dec. prelim.), U.S. consumer comfort index (weekly), U.S. NAHB homebuilder
sentiment (Dec.), U.S. Treasury international capital flows (Oct.), U.K. retail sales (Nov.), euro-zone PMI (Dec.).
Friday, Dec. 16
ECONOMY: U.S. housing starts (Nov.), Poland employment (Nov.), euro-region inflation (Nov.).

WEEKLY PRICE - VOLUME - OI (PVO)


PREV. OPEN PREV.
WKLY PREV. WKLY OI VOLUME WKLY VOL.
CURRENCY PAIR CLOSE WEEK INTEREST WEEK
% CHG. WEEK OI % CHG. (VOL.) % CHG.
CLOSE (OI) VOL.

NSE INRUSD Future Dec16 67.5200 68.3725 -1.2% 1472546 1489290 -1.1% 882184 861713 2.4%
NSE EURINR Future Dec16 71.6050 72.8300 -1.7% 40445 36443 11.0% 50064 40379 24.0%
NSE GBPINR Future Dec16 85.1575 86.2425 -1.3% 29353 28646 2.5% 31300 45343 -31.0%
NSE JPYINR Future Dec16 58.9650 60.1425 -2.0% 36512 26969 35.4% 20471 18883 8.4%

PRIVATE CLIENT GROUP [PCG]


TECHNICAL OUTLOOK SPOT USDINR
USDINR Dec. Future CMP 67.52
WEEKLY CHART
Weekly
Currency
Pivot

Resistance 2 68.75
Resistance 1 68.13
Pivot 67.78
Support 1 67.16
Support 2 66.81

Support seen between 67.25-


67.20
Last week, we mentioned our
bearish view on the pair and
same got vindicated as USDINR
Dec fut. fell 1.24% by the end
of the week.
There is a strong support of
200 DMA placed at 67.27 in
Dec. fut.
There have been many
historical tops and bottoms
between 67.25 to 67.20 range.
RSI also exited the overbought
zone, indicating weakness in
the pair.
There is a formation of triple
top around 69 odd levels.
Considering the technical
evidences discussed above, we
believe that intermediate top
has been formed and pair can
continue to extend the loss.
PRIVATE CLIENT GROUP [PCG]
TECHNICAL OUTLOOK SPOT EURINR
EURINR Dec. Future CMP 71.61
WEEKLY CHART
Weekly
Currency
Pivot

Resistance 2 74.11
Resistance 1 72.86
Pivot 72.23
Support 1 70.98
Support 2 70.36

Looks oversold
Lower tops and lower bottoms
are intact on the daily chart.
Short term moving averages
are trading below long term
moving averages
Next logical support for the Dec
fut. pair is seen at 70, while
resistance is seen at 73.50.
EURO is hovering around strong
support of 1.0500 against the
Dollar. This can lead to bullish
trend reversal for EURINR also.
Oscillators like DMI and RSI are
in to sell mode on the daily
chart.
We advise traders to wait for
the confirmation of the bullish
trend reversal, till then remain
on sidelines.

PRIVATE CLIENT GROUP [PCG]


TECHNICAL OUTLOOK SPOT GBPINR
GBPINR Dec. Future CMP 85.16
WEEKLY CHART
Weekly
Currency
Pivot

Resistance 2 87.77
Resistance 1 86.46
Pivot 85.72
Support 1 84.42
Support 2 83.68

Sell GBPINR Dec Fut. at CMP


Pair recently closed in red
candle after 4 consecutive
green candles on the weekly
chart.
From the bottom of 80.89 pair
went up to 86.87. Last week
pair registered a fall of 1.25%.
On weekly chart, pair has
formed bearish Engulfing
pattern, indicting probable
bearish trend reversal.
Primary trend of the pair has
been bearish with lower tops
and lower bottoms on the
weekly charts.
We advise selling GBPINR Dec
Fut. at cmp for the downside
targets of 83.95 and 82.40,
keeping stoploss at 86.70.

PRIVATE CLIENT GROUP [PCG]


TECHNICAL OUTLOOK SPOT JPYINR
JPYINR Dec. Future CMP : 58.97

Currency
Weekly WEEKLY CHART
Pivot

Resistance 2 60.83
Resistance 1 59.90
Pivot 59.41
Support 1 58.48
Support 2 57.99

SELL JPYINR DEC FUT at CMP


There has been significant
depreciation in JPY against
dollar in last 5 weeks, where
USDJPY moved from 101 levels
to 115 odd levels.
JPY against INR also
depreciated in the recent past.
JPYINR pair corrected from 69
levels to 59 odd levels in the
period of June to till date.
On last Friday, USDJPY broke
out from the consolidation that
held for pervious 6 consecutive
sessions. Impact of the same
would be witnessed in JPY
against INR.
Considering the setup of JPY
against the dollar, we advise
selling JPYINR Dec Fut at cmp
for the downside target of
56.50, keeping a stoploss at
59.90.

PRIVATE CLIENT GROUP [PCG]


DOLLAR INDEX EURUSD
EURUSD: Daily Chart
DXY: Daily Chart

GBPUSD USDJPY

USDJPY: Daily Chart


GBPUSD: Daily Chart

PRIVATE CLIENT GROUP [PCG]


USDINR DEC. MONTH OPTION DISTRIBUTION

Data Interpretation:
The highest Put base is at the 68 strike with 3.11 lakh contract, the highest Call base is also at the 68 strike with 2.92 lakh
contract. At The Money 67.50 strike call and put witnesses addition of 1.66 lakh and 1.83 lakh contracts during the week
suggesting indecisiveness among the traders.
The near month put call ratio stood at 0.79 from previous weeks 0.73.
The overall distribution saw support in the range of 67.00 to 66.60 while resistance around 68.10.

PRIVATE CLIENT GROUP [PCG]


USDINR DEC. FUT. ROLLING CHART (PRICE AND OPEN INTEREST)

Data Interpretation:
USDINR weakened in the week gone by, marking second consecutive weekly loss. The pair closed at 67.52 with loss of
1.2%. The near month open interest cut by 1.1% to 14.72 lakhs. The fall in price and open interest suggesting weaker
down trend. The traders have been covering short near support level.
USDINR December future trade with volatile ahead of events. The USDINR December future would find support around
67.00 and get resisted around 68.20.

PRIVATE CLIENT GROUP [PCG]


INDIA FOREX RESERVE
Indian Foreign Exchange Reserves (US$ Billions)
Wkly Chg. 2-Dec 25-Nov 18-Nov 11-Nov 4-Nov 28-Oct
Total Reserves -1.43 363.87 365.3 365.5 368.23 367.16 367.14
Foreign Currency Assets -0.95 340.13 341.08 341.27 343.92 341.94 341.92
Gold -0.48 19.98 20.46 20.46 20.46 21.4 21.4
Special Drawing Rights 0.00 1.44 1.44 1.44 1.47 1.46 1.46
Position in IMF 0.00 2.31 2.31 2.32 2.37 2.35 2.35

FOREIGN FUND FLOW VS USDINR

Foreign Fund Flows Activity

PRIVATE CLIENT GROUP [PCG]


MAJOR CURRENCIES
1 DAY 5 DAY 1 MONTH 3 MONTHS
CURRENCY PAIR OPEN HIGH LOW CLOSE
(% CHG) (% CHG) (% CHG) (% CHG)
DOLLAR INDEX SPOT 101.63 101.78 101.45 101.6 0.01 1.51 2.56 6.84
Euro Spot 1.0546 1.0568 1.052 1.0557 (0.04) (1.92) (1.68) (6.03)
British Pound Spot 1.257 1.2599 1.2546 1.2586 0.11 (1.15) 0.77 (5.63)
Japanese Yen Spot 115.27 115.72 115.16 115.69 (0.32) (1.59) (6.28) (11.96)
Indian Rupee Spot 67.5 67.6338 67.405 67.4175 (0.09) 1.20 (1.46) (1.10)
Brazilian Real Spot 3.3773 3.4104 3.3524 3.3802 (0.15) 2.86 (4.58) (3.14)
Australian Dollar Spot 0.745 0.7464 0.7431 0.7449 0.00 (0.31) (1.39) (1.55)
South Korean Won Spot 1168.93 1174.14 1167.45 1168.75 (0.24) 0.51 0.24 (4.74)
S. African Rand Spot 13.8022 13.8469 13.8022 13.8431 (0.34) (0.84) 4.25 2.78
Canadian Dollar Spot 1.3154 1.3181 1.3115 1.3126 0.40 1.10 3.28 (0.66)
Swiss Franc Spot 1.0172 1.0199 1.0156 1.0183 (0.12) (1.17) (1.98) (4.56)

MAJOR COMMODITIES
1 DAY 5 DAY 1 MONTH 3 MONTHS
COMMODITY OPEN HIGH LOW CLOSE
(% CHG) (% CHG) (% CHG) (% CHG)
GOLD 1159.28 1160.26 1154.56 1157.3 (0.22) (1.12) (5.24) (12.84)
SILVER 16.8483 16.925 16.7909 16.823 (0.23) 0.42 (0.65) (11.97)
CRUDE OIL 52.58 54.51 52.55 54.04 4.93 4.34 22.40 12.47

MAJOR INDICES
1 DAY 5 DAY 1 MONTH 3 MONTHS
INDEX OPEN HIGH LOW CLOSE
(% CHG) (% CHG) (% CHG) (% CHG)
Nifty 50 8230.7 8230.7 8195.4 8207.1 (0.66) 0.96 (1.08) (5.83)
S&P BSE SENSEX INDEX 26725.3 26725.3 26576.8 26614.9 (0.49) 1.01 (0.76) (6.13)
DOW JONES INDUS. AVG 19631.4 19757.7 19623.2 19756.9 0.72 3.06 4.82 7.81
S&P 500 INDEX 2249.7 2259.8 2249.2 2259.5 0.59 3.08 4.39 4.65
NASDAQ COMPOSITE INDEX 5436.1 5450.2 5427.1 5444.5 0.50 3.59 3.96 4.46
FTSE 100 INDEX 6931.6 6962.3 6929.5 6954.2 0.33 3.32 3.32 3.78
CAC 40 INDEX 4741.1 4780.5 4737.4 4764.1 0.60 5.19 6.12 7.30
DAX INDEX 11170.2 11231.7 11146.0 11203.6 0.22 6.57 5.02 7.40
NIKKEI 225 19183.8 19280.9 19054.0 19155.0 0.84 4.82 10.25 14.89
HANG SENG INDEX 22860.3 22863.6 22484.5 22525.4 (1.04) 0.09 (0.03) (3.29)
SHANGHAI SE COMPOSITE 3233.7 3245.1 3151.1 3161.2 (2.22) (1.36) (1.09) 4.61

PRIVATE CLIENT GROUP [PCG]


ECONOMIC EVENTS NEXT WEEK
Date Time Country Event Period Survey Prior
12/12 12/15 IN Trade Balance Nov -$10350.0m -$10160.0m
12/13/2016 07:30 CH Industrial Production YoY Nov 6.10% 6.10%
12/13/2016 15:00 UK CPI YoY Nov 1.10% 0.90%
12/13/2016 15:30 EC Employment YoY 3Q -- 1.40%
12/13/2016 15:30 EC ZEW Survey Expectations Dec -- 15.8
12/13/2016 17:30 IN CPI YoY Nov 3.90% 4.20%
12/14/2016 10:00 JN Industrial Production YoY Oct F -- -1.30%
12/14/2016 12:00 IN Wholesale Prices YoY Nov 3.10% 3.39%
12/14/2016 15:30 EC Industrial Production WDA YoY Oct 0.90% 1.20%
12/14/2016 17:30 US MBA Mortgage Applications 9-Dec -- -0.70%
12/14/2016 19:00 US PPI Final Demand YoY Nov 0.90% 0.80%
12/14/2016 19:45 US Industrial Production MoM Nov -0.20% 0.00%
12/14/2016 19:45 US Manufacturing (SIC) Production Nov -0.40% 0.20%
12/15/2016 00:30 US FOMC Rate Decision (Upper Bound) 14-Dec 0.75% 0.50%
12/15/2016 00:30 US FOMC Rate Decision (Lower Bound) 14-Dec 0.50% 0.25%
12/15/2016 06:00 JN Nikkei Japan PMI Mfg Dec P -- 51.3
12/15/2016 14:30 EC Markit Eurozone Manufacturing PMI Dec P 53.7 53.7
12/15/2016 14:30 EC Markit Eurozone Services PMI Dec P 53.7 53.8
12/15/2016 17:30 UK Bank of England Bank Rate 15-Dec 0.25% 0.25%
12/15/2016 17:30 UK BOE Asset Purchase Target Dec 435b 435b
12/15/2016 17:30 UK BOE Corporate Bond Target Dec 10b 10b
12/15/2016 19:00 US Current Account Balance 3Q -$111.0b -$119.9b
12/15/2016 19:00 US Empire Manufacturing Dec 2.6 1.5
12/15/2016 19:00 US CPI YoY Nov 1.70% 1.60%
12/15/2016 19:00 US Initial Jobless Claims 10-Dec -- 258k
12/15/2016 19:00 US Continuing Claims 3-Dec -- 2005k
12/15/2016 20:15 US Markit US Manufacturing PMI Dec P -- 54.1
12/16/2016 15:30 EC Trade Balance SA Oct 25.0b 24.9b
12/16/2016 15:30 EC CPI YoY Nov F 0.60% 0.50%
12/16/2016 19:00 US Housing Starts Nov 1230k 1323k
12/16/2016 19:00 US Building Permits Nov 1243k 1260k

PRIVATE CLIENT GROUP [PCG]


KNOWLEDGE CENTRE

How Importers And Exporters Could Use A Forex Hedge To Minimise Losses

An important tool in the global financial markets, hedging is used in every asset class to mitigate losses. This can be
utilised by anyone, whether it is an individual or corporate, to overcome the negative impact of price volatility.

For the corporate in which the business activity is dependent on import and export of commodities, there is an automatic
exposure to foreign exchange and, hence, the need for hedging is higher. In the current context, since the world markets
are interlinked, they eventually affect and impact the movement of currencies.

Hedging, in any asset class, is ultimately a strategy to decrease or transfer risk in order to protect one's portfolio or
business from uncertainty in prices. In case of hedging in the foreign exchange market, a participant who is entering a
trade with the intention of protecting the existing position from an unexpected currency move, is said to have created a
forex hedge.

With the help of a forex hedge, a participant who is long in a foreign currency pair, can protect himself from the downside
risk. On the other hand, a hedger who is short on a foreign currency pair will protect his existing position from the upside
risk.

The strategy to create a hedge would depend on the following parameters: (a) risk component (b) risk tolerance and (c) to
plan and execute the strategy.

The impact of the movement in the USD-INR currencies affects both importers and exporters. In other words, an importer
will benefit when the rupee appreciates, while the exporter will gain when the rupee depreciates against the US dollar. The
cost of import reduces when the rupee gains strength, thus benefiting an importer, and at the same time creating a loss for
the exporter, since a stronger rupee will reduce the export remittances when converted to Indian rupees.

In order to reduce the risks associated with these uncertain movements in the financial markets, both importers and
exporters can utilize the derivatives platform of currency futures. By creating an equal and opposite position in the
derivatives market, a hedge can be created.

PRIVATE CLIENT GROUP [PCG]


KNOWLEDGE CENTRE

How Hedging Works For An Importer

Suppose an oil importer wants to purchase oil worth $1,00,000 and places his order on 11 March 2016, with the delivery
date being three months away. At the time of placing the contract in the spot market, one US dollar is worth, say, Rs
66.50. However, suppose the Indian rupee depreciates to Rs 69 per dollar when the payment is due in June 2016, the
value of the payment for the importer goes up to Rs 69,00,000 rather than Rs 66,50,000.

In this case, if the importer hedges the currency risk, the losses can be reduced. Here's how the hedging strategy for the
importer would work:

Buy 100 lots of USD June 2016 contracts on 11th March 2016, assuming that June 2016 contract is trading at 67 on 11th
March 2016.
Then in June 2016, He square off 100 lots USD at 69. Profit of Rs. 200000, i.e. 1000 lot size* (69-67) *100.
Then importer makes the payment of oil purchase at 69 per dollar

Had the importer not hedged his position, he would have suffered a loss of Rs 2,50,000 (Rs 69,00,000 - Rs 66,50,000).
However, by creating a hedge position on the futures platform, his losses were reduced to Rs 50,000 due to profits in
currency hedge.

How An Exporter Can Use Hedging

A Jeweller, who is exporting gold jewellery worth US$50,000 in March 2016, wants protection against a possible
appreciation in the Indian rupee in June 2016 (spot Rs 66.50), when he receives his payment. When he is required to make
the payment in June 2016, suppose the rupee appreciates to 64. If, in this situation, he wants to lock in the exchange rate
for the above transaction, his strategy would be as follows

In March 2016, Sell 50 lots of June 2016 contract USD with a lot size of 1000,spot market @66.50. Assume that initially
the Indian rupee depreciated, but later appreciated to 64 per USD as foreseen by the exporter at end of June 2016.

Had the exporter not hedged his position, he would have suffered a loss of Rs 75,000, i.e. (50*1000*(66.50-64)), but by
creating a hedge he has made a profit of Rs 75,000 in the futures, offsetting his business loss. Hence, exposure
management is essential, given the premise of a volatile foreign exchange market. Hedging in the currency markets,
therefore, holds prime importance.

PRIVATE CLIENT GROUP [PCG]


Technical Research Analyst(Equity and Currency): Vinay Rajani (vinay.rajani@hdfcsec.com)
Research Analyst(Currency): Dilip Parmar (dilip.parmar@hdfcsec.com)

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042
HDFC securities Limited, 4th Floor, Above HDFC Bank, Astral Tower, Nr. Mithakadi 6 Road, Navrangpura, Ahmedabad-380009, Gujarat.
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conclusion from the information presented in this report.
Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We
have not received any compensation/benefits from the Subject Company or third party in connection with the Research Report.
This report has been prepared by the PCG Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this
document may or may not match or may be contrary with those of the other Research teams (Institutional, Retail) of HDFC Securities Ltd.

PRIVATE CLIENT GROUP [PCG]