15th January 2018

Fundamental Outlook

Indian Rupee: For the month ahead, we are expecting Indian rupee to trade mixed to bearish against US dollar majorly due to overall rise in crude and gold prices. Expectancy of supply cuts by major OPEC countries along with its allies such as Russia has supported oil prices in the global markets. Moreover, choppiness prevailing in Indian equity market has been unable to support Indian rupee with respect to dollar. However, China demand for crude oil has fallen down due to ongoing trade wars with United States. In addition, China is likely to face economic slowdown, fall in exports during 2019 and it has set to lower its GDP growth rate to 6% from 6.5%, lowest since the last 28 years. This could weigh on the oil prices eventually limiting major depreciation in rupee. For the coming month, Indian currency is expected to trade in the range of 69.3-72.6.

Dollar Index: Looking forward for the coming month, we are expecting dollar index to witness further downside as the ISM Manufacturing PMI, Non ISM Manufacturing PMI, Core PPI and CB Consumer Confidence has been reported to be lower on a monthly basis. Rise in jobless claims on a monthly basis can also have a negative impact on the dollar prices. However, major downside is also likely to be limited as Average Hourly Earnings m/m and CPI has been reported to be higher compared to the previous month. Moreover, positive cues abut US China trade talks can also support dollar index from the lower levels. In addition, the non farm employment rate on a monthly basis has been reported to be higher which could also cushion prices from major downside. For the coming month, Dollar Index is expected to trade in the range of 93.4-97.70.

Euro: The Euro is forecasted to remain in the negative zone for the month ahead, with the risk of a no-deal Brexit, trade tensions, global uncertainty and a lack of skilled workers weighing on the growth outlook of Europe’s largest economy Germany. Major slowdown in Germany has been witnessed in German Prelim CPI m/m , German Factory Orders m/m , Flash Service PMI and Industrial Production on a monthly basis. Moreover, drop has been witnessed in European CPI Flash Estimate on a yearly basis, Core CPI Flash Estimate is less likely to cushion Euro. Euro zone inflation slowed in December more than markets had forecast and moved away from the European Central Bank target, strengthening predictions that a hike in interest rates may not come this year. Inflation was held back by a sharp slowdown in energy prices, while core indicators remained stable at low levels. For the month ahead, Euro is expected trade in the range of 1.1215 to 1.1816.

Sterling Pound: Looking forward for the coming month, we expect sterling pound to trade mixed to bearish with improvements in the manufacturing production & construction PMI, but then fall in the manufacturing and service PMI may bring down the Sterling pound. Moreover, fears of rising borrowing costs of UK households and business may increase the risk in the event of no-deal Brexit as warned by Bank of England. This could also lower the Pound in the global markets. Recently, the Governor Mark Carney said in a press conference that Bank of England policymakers will be “prudent not passive” after Britain leaves the European Union, keeping a close eye on exchange rate moves and other factors affecting inflation. In the coming month, the sterling pound is estimated to trade in the range of 1.2477 to 1.3299.

Japanese Yen: The Japanese Yen is expected to trade mixed for the month ahead, as the Bank of Japan has forecasted to continue its moderate expansion for the coming months. But then, downside risks are also heightening amid concerns regarding instability in stock markets due to growing global economic uncertainties, trade friction between the United States and China and no major growth in business investments in Japan. Furthermore, Japan is taking longer than expected to achieve his 2% inflation target, which could also hamper the growth prospects in the coming months. In addition, the recovery in exports to China has been weak, and exports as a whole also have shown weak developments which could also weigh on the Japanese Yen. For the month of ahead, Japanese Yen is expected to trade in the range of 107.30 to 114.55.

News & Development US-China trade talks

The U.S. and China held deputy-level trade talks in Beijing earlier starting on 7th January. The American side in the trade talks was being led by a deputy US trade representative, Jeffrey Gerrish, according to the US government. The delegation includes agriculture, energy, commerce, treasury and State Department officials. The Chinese government gave no details of who would represent Beijing. Officials at the American Embassy and China's Ministry of Commerce provided no details on the meeting. The discussions lasted one day longer than planned and both sides issued vague but mildly positive official statements about the discussions. Yet neither has indicated its stance has changed since a 1 December agreement by Presidents Donald Trump and Xi Jinping to postpone further increases.

The talks went ahead despite tensions over the arrest of a Chinese tech executive in Canada on US charges related to possible violations of trade sanctions against Iran. Moreover, based on recent sources, Chinese consumers have started to take sides in the trade wars which could also pose a problem for the U.S. companies such as Apple which has recently witnessed a slump in its sales and exports of Apple phones and are expecting a tough first quarter-2019.

Elsewhere, the OPEC Secretary General Mohammed Barkindo still has concerns regarding the on going trade wars which could potentially disrupt growth in major Asian markets that import the highest proportion of the world's crude. He further added that "Any measures that may impact or constrain trade may likely impact on growth and by extension on demand for energy. At the moment, outside the U.S., China and India remain the brightest spots in terms of demand for energy.

Based on the above chart, Indian currency had been trading weak during the first nine months of 2018 till mid October owing to further strengthening of the U.S. Economy, prevailing trade wars tensions between US-China, rising crude and gold prices in the global markets. But then, rupee started to appreciate from the second half of October onwards due to gradual rise in Indian equity markets and fall in global crude prices. Fall in crude prices came after poor third quarter results of China published during the last month, leading to downtrend in demand for crude in Chinese industries. Moreover, prevailing US China trade wars, global slowdown concerns and expectancy of lower fourth quarterly results in China has appreciated the rupee.

For the month ahead, we are expecting Indian rupee to trade mixed to bearish majorly due to overall rise in crude and gold prices. Expectancy of supply cuts by major OPEC countries along with its allies such as Russia has supported oil prices in the global markets. Moreover, choppiness prevailing in Indian equity market has been unable to support Indian rupee with respect to dollar. However, China’s demand for crude oil has fallen down due to ongoing trade wars with United States. In addition, China is likely to face economic slowdown, fall in exports during 2019 and it has set to lower its GDP growth rate to 6% from 6.5%, lowest since the last 28 years. This could weigh on the oil prices eventually limiting major depreciation in rupee.

65.02

68.00

66.90

69.05 69.94

72.97

74.07

67.98 69.89

73.68

70.20

71.86

64

66

68

70

72

74

Indian Rupee (USD/INR)

Source : Bloomberg & Choice Research

US Dollar Index which has been sustaining at the higher levels in the month of Nov’18 observed a gradual decline during the month of December and closed at $95.9 by 8th January. This is majorly due to falling US equity markets, concerns about health of the global economies, prevailing trade tensions between U.S. and China and partial US government shut down.

Rise in the initial jobless claims during the last week of Dec’18 after the fall in the first week of the same month had also weighed on the dollar index. Initial jobless claims has been reported at 231000. Jobless claims currently are at the same higher range similar compared to the previous month. However, the total nonfarm payroll employment by U.S. Bureau of Labor Statistics rose by 136,000 in December to 312,000 after the fall observed in the previous month. Job gains occurred in health care, food services and drinking places, construction, manufacturing, and retail trade. The December jobs gain pushed total US employment above 150 million jobs for the first time.

Looking forward for the coming month, we are expecting dollar index to witness further downside as the ISM Manufacturing PMI has been reported to be lower at 54.1 compared to the forecasts of 57.7 and previous reports of 59.3. Moreover, the unemployment rate has risen to 3.9% as compared to 3.5% of the predictions.

Similarly, ISM Non-Manufacturing PMI has been at 57.6, lower than the forecasts of 59.6 and lesser compared to 60.7 of the previous month. Likewise, Core PPI m/m actuals came at 0.5%, down in compared to the forecasts of 0.2%. Also, the CB Consumer Confidence has been reported at 128.1, lower compared to the forecasts of 133.7 and previous month’s actuals of 136.4.

However, major downside in dollar index may be supported as the Average Hourly Earnings m/m rose up to 0.4% in comparison to the forecasts of 0.3% and previous actuals of 0.2%. CPI and Core CPI on a month on month basis (m/m) has remained unchanged at -0.1% and 0.2% respectively, compared to the forecasts.

Furthermore, prevailing trade war tensions between United States and China is still having a greater dominance on the movement of the international currencies. Both the above countries are taking efforts to resolve their differences through talks during the current Truce period. Deputy trade talks had already taken place during the last week and so far there were some positive signs that the talks have been going well. But, the question still remains whether both the countries would be able to resolve the disputes or come to a final agreement regarding the trade wars by the start of March; which is also a concern to the global markets. In addition, recent sources have highlighted that China has more to lose than it gains if the trade talks doesn’t go well and it faces slowdown in its economy. Correspondingly, China is also taking efforts for further extension of truce with the U.S. to get down to further agreement. The above geopolitical factors may however limit any major uptrend in US dollar and the dollar index is likely to stay on the weaker zone during the coming weeks.

89.84

93.12

94.82 95.29

96.74

96.73 95.14

97.54

95.90

97.44

88.5

90.5

92.5

94.5

96.5

98.5

US Dollar Index (DX)

Source : Bloomberg & Choice Research

The above chart showcases that Euro has majorly traded mixed during the last couple of months owing to prevailing trade tensions between U.S. and China, global slowdown concerns and upcoming Brexit. But then, the Euro currency has showcased some pullback during Dec’18 as Euro zone inflation had slowed on a monthly basis, while core inflation readings were also below market expectations, supporting European Central Bank policymakers who favor a cautious exit from monetary stimulus.

For the coming month, we expect euro prices to witness decline with the risk of a no-deal Brexit, trade tensions, global uncertainty and a lack of skilled workers weighing on the growth outlook of Europe’s largest economy Germany. The German Prelim CPI m/m released by Destatis came at 0.1%, lower compared to the forecasts of 0.3% and previous actuals of 0.1%. The German Flash Manufacturing PMI came at 51.5 similar in comparison with the forecasts of 51.5 and last month`s actuals of 51.5. Growth in Germany’s manufacturing sector slowed again in December as new orders fell at the fastest rate in four years, based on recent sources. Correspondingly, actuals of German Flash Services PMI fell down to 51.8 in contrast to forecasts of 52.5 and previous month’s actuals of 52.5. Similarly, German Industrial Production m/m has been reported at -1.9%, lower than the forecasts of 0.3% and lower compared to -0.8% of the previous month. Correspondingly, German Factory Orders m/m has come down to -1.0% compared to forecasts of -0.2%.

Nevertheless, the German Trade Balance has been reported at 19.0 Billion Euros, higher compared to 17.3 Billion of the previous month. Elsewhere, the French Flash Manufacturing PMI for the December month has been reported at 49.7, similar compared to the forecasts of 49.7 and the last month’s reports of 49.7. But then, the French Preliminary CPI m/m fell to 0.0% over the forecasts of 0.1% and 0.4%. Moreover, the French Final Services PMI came down to 49.0 compared to forecasts of 49.7 and former actuals of 49.6. French Industrial Production m/m came down to -1.3%, lower compared to the forecasts of 0%. In the case of Spanish Manufacturing PMI, it has also come down to 51.1 compared to the forecasts of 52.4. Likewise, the Spanish Unemployment Change has also fallen down on a monthly basis which is likely to weigh on the Euro currency.

In addition, European CPI Flash Estimate y/y has declined to 1.6% after the previous positive actuals of 1.9%. Euro zone inflation slowed in December more than markets had forecast and moved away from the European Central Bank target, strengthening predictions that a hike in interest rates may not come this year(2019). Inflation was held back by a sharp slowdown in energy prices, while core indicators remained stable at low levels. The Core CPI Flash Estímate y/y has remained similar at 1.0% compared to forecast of 1.0% and unchanged as compared to the previous reports. However, unexpected fall in inflation earlier mentioned has further delayed the European Central Bank objective hike its interest rates. Since the inflation has moved away from the Central bank’s target of 2%, interest rate hike are not likely to be witnessed before year 2020. In conclusion, the factors still showcases various struggles and challenges that the European Union is facing in reviving its economy and we are still estimating bearish trend to prevail in Euro currency for the coming month.

1.256

1.192

1.122

1.165

1.177 1.175 1.175 1.168

1.141

1.177 1.142 1.144

1.10

1.12

1.14

1.16

1.18

1.20

1.22

1.24

1.26Euro (EUR/USD)

Source : Bloomberg & Choice Research

However, Net Lending to Individuals m/m from UK came in at 4.4 Billion lower against market expectations of 4.9 Billion for Oct’18. Moreover the above index is lower compared to 4.8 Billion of the previous month. The Construction PMI has been reported at 52.8 slightly lower compared to the forecasts of 52,9 and previous month’s actuals of 53.4. Furthermore, UK’s GDP actuals on monthly basis has showcased a rise to 0.2% as compared to the forecasts of 0.1%.

Correspondingly, the Governor Mark Carney said on 9th January in a press conference that Bank of England policymakers will be “prudent not passive” after Britain leaves the European Union, keeping a close eye on exchange rate moves and other factors affecting inflation. He further added that Britain is due to quit the EU on March 29, though Prime Minister Theresa May is struggling to find parliamentary support for the transition deal she agreed with the bloc in November, without which there is a risk of chaos at Britain’s borders. He also warned about the risk that Sterling pound may face leading to further decline if markets judged economic ties between Britain and the EU were being weakened. Furthermore, he mentioned regarding the nature of partnership in parliament and the prospects for sterling will depend heavily on how Brexit actually progresses. In addition, he further cited that The BoE and Britain’s banks are ready for whatever form Brexit takes and the Monetary Policy Committee is well-prepared for whichever path the economy takes.

In conclusion, along with the Sterling pound, Brexit uncertainties have been starting to show up more in other assets prices too, like UK-focused equity prices and bank funding costs. It has also created uneasy fear in the global markets are we are likely to witness further downtrend in Sterling pound for the month ahead.

The Sterling pound has majorly traded mixed to weak during the month of December and in the first week of January owing to further strengthening of US dollar, prevailing US China trade wars, steady monetary policy by the BOE and tensions regarding Brexit which is likely to take place by the end of the first quarter of 2019.

Looking forward for the coming month, we expect sterling pound to trade mixed to bearish with improvements in the manufacturing production & construction PMI, but then fall in the manufacturing and service PMI may bring down the Sterling pound. Moreover, fears of rising borrowing costs of UK households and business may bring a rise in the event of no-deal Brexit as warned by Bank of England, which may also lower the pound currency in the global markets. The manufacturing production m/m has been reported at -0.3%, lower compared to forecasts of 0.4% and higher compared to previous month’s reports of -0.6%. Likewise, Service PMI from UK came in 51.2 for Dec’18 higher against market expectations of 50.7. Similarly, Manufacturing PMI for Dec’18 has reported higher at 54.2 compared to the forecasts of 52.5 and previous actuals of 53.6. Correspondingly, Hafilax HPI m/m has also turned out to be greater that forecasts at 2.2% compared to the forecast of 0.5%. In the same way, it has also been reported to be higher that previous month’s -1.2%. Industrial Production m/m has fallen to -0.4% compared to forecasts of 0.3%.

1.423

1.303

1.354 1.314

1.312

1.334

1.277

1.326

1.304

1.273

1.18

1.23

1.28

1.33

1.38

1.43

1.48

Sterling Pound (GBP/USD)

Source : Bloomberg & Choice Research

Overall strong economic data of the United States reported during the third quarter of 2018, led to gradual decline in Japanese Yen. This had also led to further shifting of investments from safe haven Yen back into the U.S. However, the Japanese Yen gained back strength by the end of October after Bank of Japan (BOJ) has reported moderate expansion of the Japanese economy to continue during the coming months. Moreover, significant appreciation had also been witnessed in the month of December with decline in the dollar index owing to growing concerns about the health of the global economy, US China trade war tensions and upcoming Brexit.

Going forward for the coming month we expect mixed trend in Japanese Yen as Bank of Japan is still optimistic about the moderate expansion of the Japanese Economy, though Japan's GDP for the July-September quarter registered negative growth due to natural disasters. But, downside risks are also heightening amid concerns regarding instability in stock markets due to growing global economic uncertainties, trade friction between the United States and China and no major growth in business investments in Japan. Conversely, Bank of Japan’s Governor Haruhiko Kuroda believes that the world's third-largest economy Japan was resilient enough to withstand any external shocks. Conceding that it was taking longer than expected to achieve his 2% inflation target, Mr. Kuroda also said that policy makers needed to be vigilant to heightening external risks-

such as protectionism and slowing growth in China. He further added, while tight supply-demand conditions have been encouraging expansion of production capacity, it is necessary to pay attention to increasing downside risks due to overseas economies. As the restoration of infrastructure has progressed following the successive natural disasters, production and exports have picked up after declining. However, Bank of Japan is still doubtful regarding the outlook for economic activity since cautious views have been increasing owing to earlier mentioned trade fictions. Looking at the latest data on trade activities in China, both exports and imports marked negative growth on a month-on-month basis, which possibly indicates a deceleration in the Chinese economy. In China, defaults of private firms have been increasing, and authorities have been requesting that banks increase lending in order to resolve the difficulty in funding. Turning to Japan's economy, the actual condition of restoration-related demand and production stemming from natural disasters has been strong. But then again, the recovery in exports to China has been weak, and exports as a whole also have shown weak developments. While there has been increase in investment and wages in the corporate sector, a challenge still lies in the household sector where the mechanism of the virtuous cycle from income to consumption expenditure has been operating weak. All these above factors are expected to bring a mixed trend in Japanese Yean for the month ahead, however we also could possibly witness depreciation in case the situations do not favor major growth of developments at the domestic and the international levels.

109.86

106.79

110.37

112.88

112.29 111.68

111.05

114.53 114.07 113.33

108.51

103

105

107

109

111

113

115

Japanese Yen (USD/JPY)

Source : Bloomberg & Choice Research

Technical Outlook

USD/INR

USDINR has started a month on negative note and made a new low of 69.38, after that pair has shown good reversal from the bottom and moved above the prior month close of 69.94 levels with total gain of 1.7% till 15th Jan’19. On a weekly chart, Pair has confirmed “Bullish Engulfing” candlestick pattern, which indicates bull run in the prices for long term. Moreover, pair has also sustained above 100 weeks DEMA, which reinforce bullishness in the counter. Furthermore, price has moved above “Ichimoku Cloud” with positive crossover between span A and span B line. On the daily chart, pair has also given a breakout of “Falling Wedge” pattern; which confirms bullish sentiments for near term. In additions, a momentum indicator RSI (14) reading is at 56 level as well as it sustains above the trend line with positive crossover; which point-out bullish strength in the prices. So, based on the above technical structures and parameters, we expect bullish momentum in USD/INR futures for the month. On the higher end, price may find the resistance around 72.60 levels, while on the lower end; it may test the support at Rs.69.30 levels.

Technical Outlook

EUR/USD

On the daily chart, EURUSD price has been trading in Rising Channel from last couple of days, where pair has corrected from the upper line of the formation; which indicates bearish movement in the counter. Moreover pair has also shifted below 100 days Simple Moving Average; which suggest further bearishness in the prices for near term. Furthermore, price has retreated from upper “Bollinger Band” pattern; which stipulate further downtrend in the counter. A momentum indicator RSI (14) and MACD has shown negative crossover on the daily chart; which point out medium term trend remains bearish. So, based on the above technical structures and parameters, we expect bearish momentum in EUR/USD futures for the month. On the higher end, price may find the resistance around 1.1816 levels, while on the lower end; it may test the support at Rs.1.1215 levels.

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