Monthly Currency Derivatives

Monthly Currency Derivatives US$INR has crucial resistance near 65.7 level Research Analyst Amit Gupta amit.gup@icicisecurities.com Gaurav Shah gaurav.shah@icicisecurities.com March 5, 218

Positional Recommendations Sell US$INR Sell US$INR March future at 65.35 65.45, Target: 64.7, Stop loss: 66. US$INR Strategy Rationale: The rupee weakened sharply vs. US$ as well as against other major currencies due to tightening of global yields coupled with outflows in domestic markets. However, we expect the current US$ rally to fizzle out as the US President s plan to impose import duties may raise concerns on currency as well as trade wars. The domestic central bank could utilise record forex reserves, if the rupee depreciates sharply from current levels as the RBI aims to curb volatility in the short term instead of targeting rupee levels. Recent political gains to the ruling party at the Centre is further positive in terms of continuity in central government policies and its agenda of economic development. BUY JPYINR Buy JPYINR March future at 61. 61.1, Target: 63.1, Stop loss: 6.2 Rationale: JPYINR Strategy The JPY rose sharply against US$ as well as other major currencies on the back of risk aversion as well as rising expectation of BoJ turning hawkish earlier than expected. Uptick in Japan core inflation in January to.4% has raised expectation that headline inflation would also increase. The 1-year JGB yields have been consistently trading away from %, which could be because BoJ would prefer to save financial institution s investments against aggressive monetary policy led yield control. JPY generally appreciates during political, economic or financial turbulence. Recent comments by the US President to levy import duties on metals in US could lead to trade wars and corresponding disruption to global trade. On the back of such factors, we expect JPY to further appreciate towards 13 vs. US$ while 17.5 would act as near term resistance. 2

Mar-17 May-17 Nov-17 63. 63.5 64. 64.5 65. 65.5 66. 66.5 67. US$INR Options OI In 's Open interest in ooo's US$INR future US$ recovers against major currencies as well as emerging currencies, fuelled by rate hike Deal prospects Team At Your Service US$ reverses losses in February: The Dollar Index reversed its losing streak of three-months recovering from near three-year lows at 88.25 levels to 9.61. Rising US yields along with hawkish rhetoric from US Fed Chair Jerome Powell s first congressional testimony supported dollar. This raised US interest rate hike expectation to 1 bps from current expectations of 75-bps hike for 218. US 1-year treasury yields traded in the range of 2.93-2.64% levels registering four-year highs since March 214. Fed is expected to raise interest rates by 25 bps in its upcoming March FOMC monetary policy meeting with the current probability at near 96%. Traders would keenly watch the employment data as well as inflation data, going forward, as a downtick in data could create a hurdle for Fed s hawkish stance Rupee declines sharply: The rupee sustained sharp losses against the US$ in February at 65.17, down 2.5%. Domestic benchmark yields tested seven-months highs at 7.81%, maintaining a higher range of 7.37-7.81%. Domestic bonds were hit by hardening global yields triggering outflows as well as concerns about domestic inflation outlook Futures and options activity: In the options segment, 65. has the highest Call as well as Put OI. In the future segment, the current rise in pair has seen huge addition to open interest. However, a further sharp depreciation could be limited. Hence, we suggest selling US$INR March futures at 65.4 for a target of 64.7 US$INR March series options build up US$INR has support near 64.6 levels 25 Call OI Put OI 6 55 US$INR future OI US$INR future price 67 2 5 66 15 45 4 65 1 35 3 64 5 25 2 15 63 1 62 Source: Bloomberg, ICICIdirect.com Research 3

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Mar-17 May-17 Nov-17 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Monthly Non-Farm payrolls in 's Hourly earning growth % Dollar index spot Nov-17 % yield change Probability of rate hike Deal US rate Team hike prospects At Your brighten, Service employment data remains supportive Rising US as well as global yields could see pressure on emerging currencies including rupee 3 25 2 US UK EU Japan 1 March interest rate hike almost certain with next rate hike expected in June 218 8 21-Mar 2-May 13-Jun 15 6 1 4 5 2-5 Non farm payrolls, wages growth index rise in January supporting rate hike prospects 38 33 Monthly Non farm payrolls (LHS) Hourly earnings growth (RHS) 3.5 3 18 13 US$ index reverses its losses from crucial 88-level supports 28 2.5 98 23 2 93 18 13 8 3 1.5 1.5 88 83 78 Source: Bloomberg, CICIdirect.com Research 4

Aug-15 Oct-15 Dec-15 Feb-16 Jun-16 Aug-16 Dec-16 Feb-17 In $ billion In $ billion Monthly FPI investment in crores Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Jul-16 Feb-17 Mar-17 May-17 Nov-17 $ billion Yield % change base = 1 Deal Forex outflows, Team adverse At Your trade Service balance figures may cap runaway rupee appreciation RBI has been intervening by buying in spot as well as creating long US$ positions in forwards 35 3 25 2 Net US$ Purchase/(Sale) US$ forwards long positions Rising yields along with rupee depreciation may impact flows in near term 115 11 15 brazil India Mexico China Indonesia Russia 15 1 1 5 95 9-5 Rising adverse trade balance increases risk of rise in current account deficit for FY18-2 -4-6 -8-1 -12-14 -16-18 Monthly trade balance (LHS) -5-1 -15-2 -25-3 -35 Annual CAD (RHS) Foreign portfolio investors (FPI flows) have been net sellers to the tune of almost $2 billion in February 218 8 6 4 2-2 -4-6 Source: Bloomberg, ICICIdirect.com Research 5

Oct-15 Dec-15 Feb-16 Jun-16 Aug-16 Dec-16 Feb-17 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Jul-16 No. of Contracts in 's Euro-US$ spot Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Jul-16 CPI % Euro fails to breach its 1.26 hurdle vs. US$, sliding inflation growth may create hurdle for Deal ECB Team At Your Service The Euro failed to sustain its gains after testing over threeyear highs at 1.255. Euro declined vs. US$ and is currently at 1.232, down by almost 1 pps from last month Euro area HICP inflation growth in January further declined to 1.3% against 1.4% growth in December CFTC data shows closure in long Euro positions. Total long euro positions declined to 22% from 25% in January We expect Euro to remain in a range of 1.21 1.25 in the near term, with focus on upcoming ECB monetary policy meeting as well political development in Italy as rising right wing political parties popularity is a threat to Euro Euro area HICP inflation growth dips to 1.3% in January 2.5 2 1.5 1.5 -.5-1 Consolidation in Euro lead to closure in long positions Euro-US$ pair has crucial support placed at 1.21 levels 3 25 2 15 1 5 Short Long 1.5 1.4 1.3 1.2 1.1 1.9 Source: Bloomberg, ICICIdirect.com Research 6

Jan-16 Jul-16 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Jul-16 Yield % US$JPY Spot Apr-15 Aug-15 Dec-15 Aug-16 Dec-16 % growth JPY gains post BoJ monetary policy meeting as it tweaked inflation expectation Deal assessment... Team At Your Service The Japanese Yen gained sharply against US$ and also against other currencies in February. JPY ended at 16.68 v/s US$ levels gaining almost 2.3% Japan inflation growth remained consistent in January at.9%. However, core inflation rose to.4% from.3%. Mild inflation gains coupled with change in BoJ s inflation language fuelled a rally in JPY JGB 1-year yields have been trading away from its stated policy of keeping near %. This has raised speculation that BoJ could have lowered its quantum of JGB purchases We expect US$JPY to decline till 13 levels while 17.5 is a near term resistance. Limited rupee appreciation and strength in Yen could lead to sustained gains in JPYINR Japan 1-year yields trade away from % raising speculation of BoJ reduced bond buying.3 Japan core inflation growth rise in January to.4%, while BoJ followed gauge remains steady at.9% 1.5 1.3 1.1.9.7.5.3.1 -.1 -.3 -.5 -.7 125 Japan Core inflation yoy Japan National CPI yoy US$JPY has near term resistance at 17.5 level.2.1 -.1 -.2 -.3 -.4 12 115 11 15 1 95 Source: Bloomberg, ICICIdirect.com Research 7

Sep-16 Nov-16 Mar-17 May-17 Nov-17 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Probability of rate hike GBP-US$ spot Jan-1 Jun-1 Nov-1 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Sep-16 Feb-17 % growth Rising UK core inflation raises fears of further inflation growth, stoking speculation of Deal earlier Team interest rate At hike Your Service The GBP witnessed mild profit booking and bounced off from supports near 1.38 levels. It is currently trading near 1.38, down 2.4% during February UK January inflation growth was steady at 3%, above BoE target of 2%. However, recent growth seen in core inflation at 2.7% from 2.5% has raised concerns on a further rise in CPI YoY from 3% Rising inflation concerns have raised market expectation of 25 bps rate hike by BoE in its May monetary policy meeting GBPUS$ has support placed near 1.36 levels. However, with renewed concerns on Brexit and US$ slide, we expect the GBP to trade in the range of 1.36 1.4 in the near term Rise in January Core CPI raises concerns on further rise in UK inflation 6 5 4 3 2 1-1 UK CPI yoy UK Core CPI 1 8 6 4 2 UK interest rate hike prospects gain on the back of sustained inflation growth 22-Mar 1-May 21-Jun GBPUS$ may see some consolidation and has crucial support near 1.36 levels 1.6 1.5 1.4 1.3 1.2 1.1 Source: Bloomberg, ICICIdirect.com Research 8

Global Snapshot C u r r e n t p r ice Fe b r u ar y C lo s e Jan u ar y C lo s e % ch an g e Nif ty 1348 1458 1128-5.16 DJIA 24538 2469 26149-5.89 S & P 2691 2678 2824-5.18 CA C 5137 5263 5482-4. DA X 11914 12191 13189-7.57 FTS E 77 7176 7534-4.75 NIK K EI 2142 21724 2398-5.95 NY MEX Crude 61.43 6.99 64.73-5.78 BRENT Crude 64.57 63.83 69.5-7.56 G O L D 1327 1317 1345-2.9 G -Sec 1 yr yield 7.75 7.74 7.43 4.19 G -Sec 2 yr yield 6.98 6.98 6.86 1.78 US 1 yr yield 2.83 2.81 2.71 3.8 Dollar Index 9.15 9.32 89.13 1.34 Euro 1.23 1.23 1.24-1.18 G BP 1.38 1.38 1.42-2.92 JPY 15.5 16.2 19.2-2.7 INR 65.11 65.17 63.59 2.48 Source: Bloomberg, ICICIdirect.com Research 9

Deal Forthcoming Team Events At Your Service India: 5 March: PMI manufacturing 1 March ; BoP current account balance 12 March : CPI 15 March ; Exports, Imports, Trade balance 28 March : Fiscal deficit US: 1 March : PCE data, PMI Manufacturing 2 March : Inflation expectations 9 March : February employment data 21 March : FOMC Monetary policy meeting 28 March : GDP data Euro zone: 1 March : Eurozone manufacturing PMI 5 March : Composite and Services PMI, Retail sales 8 March : ECB Monetary policy meeting 16 March : Core CPI China : 3 March: Caixin Manufacturing PMI 8 March : Imports, Exports and Trade balance 14 March : Retail sales, Industrial production Japan: 1 March : Nikkei Manufacturing PMI 2 March : CPI 8 March : GDP 9 March : BoJ Monetary policy meeting 19 March : Imports, Exports, Trade balance UK: 1 March : Manufacturing PMI 9 March: Manufacturing production, Industrial production. 2 March ; CPI 22 March : BoE monetary policy meeting 1

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