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Yen Outlook Report

Yen Summary (Past few months): 

Yen has weakened more than 45% against USD from the Covid crisis low of 102.88, hitting a high of 151.95 in September 2022.  This high was seen once again in November this year.  The rise in USDJPY during the last 3 years has been on the back of rising U.S. interest rates while the Japanese monetary policy has continued with ultra-easy stance and unrelenting quantitative easing by the Bank of Japan.  Though they did tweak their yield curve control policy slightly during this year, the 10-year yield has a difference of 3.7% with the U.S. and the same had a seen widest difference 4.16% last month.    

It is for the above reason that investors have been borrowing in Yen at cheap cost and selling the same against other U.S. and other high yielding currencies for investment (bonds and equities).  They have also invested in some EM countries/currencies like Mexico and Brazil as a CARRY TRADE.  The carry trade position against Yen has been one of the highest in historical terms. 

Recent Updates: 

We have seen the Japanese economy turn around modestly in last six months and their inflation has been in the region of 4% vs. 2% target they have been set to achieve.  Many renowned global investors have been buying Japanese stocks this year due to which the Japanese Nikkei Index has been an outperformer rising nearly 23%.  Even so, the index is more than 10% below the all-time highs that was seen more than three decades ago (in 1989).  There is a perception that Japanese stocks remain one of the most undervalued markets and that has kept the global investors interested. 

Factors Influencing Yen: 

The investor demand for investing in Yen is on the rise for the above reason and the following: 

  1. Fall in U.S. yields and the expectation of a rate cut by the FED next year is leading many investors to start unwinding the Yen shorts gradually 
  2. With inflation in Japan persisting at 4% consistently, there is increasing pressure on Japanese Central Bank to reverse their easy money policy which they are expected to do in April next year as per market indications.  A change in their policy towards tightness will lead to huge unwinding of short positions and rise in Yen value.   
  3. Weak Yen is also increasing the cost of living for Japanese people increasing the political pressure to stop it from further weakness.  The threat of direct intervention to sell Dollars against Yen is leading to more short covering demand. 
  4. General Dollar weakness in recent months has led investors to cover their Yen short positions too 
  5. Importers in Japan are affected badly due to weak Yen as it affects their import costs which will eventually lead to unviable investment. 

Yen looks fundamentally undervalued and seems overbought against currencies like EURO and GBP and a correction in the same looks imminent. 

Thereby, Yen is expected to strengthen in the coming months, moving towards 138/140 looks likely by the middle of next year if not earlier, while upside is limited to 153 

CONCLUSION: Creating Yen liability at this rate is fraught with two risks –  

  1. Strength in Yen that can affect the cost adversely;  

Borrowing/interest cost in Yen can also rise as and when BOJ changes policy

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Monthly Outlook Mar’24

It is not the strongest or the most intelligent who will survive but those who can best manage change.

– Charles Darwin 

Month of February did manage to show the consistent trait of financial markets – CHANGE –  as it saw various asset classes moving without a correlation and no single theme running through them.  Policy outlook uncertainty ruled the sentiment as last mile journey towards inflation goal was proving tough.  Highest volatility was seen in cryptos while it was the least in the currencies.  But some direction seemed to be emerging towards the end of the month, though bigger breakouts were not visible in the currencies. 

The major themes that guided the markets were- 

  1. Divergence between market expectation on rate cuts and FED statements on the same narrowed down 
  2. Stickier inflation numbers  confirmed by CPI, PPI and PCE data in the U.S.  In Europe, they were mixed across countries  
  3. Stocks continued to make new highs in various regions.  Nikkei made a new all-time high after 35 years surpassing 40000 marks 
  4. New age tech stocks, AI companies led the rally in US markets, while investors in other markets followed US cues  
  5. Economic picture in the U.S. remained strong on employment, but was on the slowing side in manufacturing and forward-looking indicators 
  6. Europe showed more stabilizing picture which encouraged investors to diversity more into European assets.  UK Pound remained attractive due to its highest policy rate after U.S. 
  7. China markets were on the other extreme, dropping to lows seen during the Covid time.  Government measures of cutting policy did not result in sustainable rallies leaving more expectations for structural reforms unfulfilled.  Policymakers were intervening in stock and currency markets continuously.   
  8. Emerging markets were less exuberant having rallied hard for several months, but India stood out with robust data on GDP, manufacturing and inflation slowly inching down.  Equities continued to make new highs regularly.   
  9. Crypto market saw record rally, with Bitcoin gaining nearly 62% in the last one month.  The fresh rally was aided by the new ETFs launched in the U.S. with huge demand from small investors and big alike. 
  10. Gold was the other asset class to rally 8% in one month as investors diversified marginally from equities and bonds and on conviction that rates had peaked across economies, though uncertainty about timing of cuts remained.   
  11. February marked the third straight month of no hikes from G10 central banks – the longest such streak since summer 2021. Central Banks of Australia, New Zealand, UK, Sweden and India met during the month of February but decided to leave policy rates unchanged. 

KEY ECONOMIC DATA FOR MAJOR COUNTRIES 

During the month mixed data has been observed from U.S. but quite some numbers from Europe improving.  UK was steady but China continued to struggle, still awaiting big policy moves from the Government.   

U.S. employment data surprised to the upside with Non-Farm Payrolls rising by 353000 during January vs. market forecast of 180000, but the household survey actually indicated employment dropping.  Also rise in jobs was due to more part-time jobs being created.  Another indicator of weakness was average weekly hours worked that came at 34.1 vs. 34.3 which means more people were employed by reducing the working hours in general.   

Leading Economic Index – It was the 23rd straight monthly decline, just one month short of the record-long slump that began in April 2007 and ran through March 2009 during the global financial crisis.  The LEI is a forward looking indicator which gives a sense that in the months ahead the economy may be slowing. 

Manufacturing PMI in the U.S. economy fell from 49.1 to 47.8 and it was the 16th straight month the PMI remained below 50, which indicates contraction in manufacturing.   The ISM Services PMI for February dipped a bit to 52.6 vs. 53.0 forecast and 53.4 in January. Employment fell dropping back into contraction to 48.0 from 50.5 in January, which was the second lowest since Q3 2020. Factory orders in the U.S. in January saw the biggest contraction since April 2020.   

  U.S.A EUROPE U.K. JAPAN CHINA INDIA 
Particulars current vs. prev current vs. previous current vs. prev. current vs. prev. current vs. prev. current vs. prev. 
GDP QOQ 3.2 VS. 3.3% 0% vs. -0.1% *-0.3% vs. -0.1 *-0.1 vs. -0.8 1.0 vs. 1.3% 8.4 vs. 8.1% 
              
Ind. Prod YOY 0 vs. 1.2% 1.2% vs. -5.4% 0.6% vs. 0.1% *-1% vs. -1.4% 6.8% vs. 6.6 3.8 vs. 2.4% 
              
PMI MFG 52.2 vs. 50.7 46.6 vs. 4.4. 47.3 vs. 46.2 48 vs. 47.9 49.1 vs. 49.2 56.9 vs. 56.5 
PMI SERV 52.9 vs. 51.4 50.2 vs. 48.4 53.8 vs. 53.4 53.1 vs. 51.5 51.4 vs. 50.7 60.6 vs. 61.8 
              
Jobless Rate 3.7 vs. 3.7 6.4 vs. 6.5 3.8% vs. 3.9% 2.4 vs. 2.4 5% vs. 5% 3.1% in 2023 
              
Inflation 
Headline 3.1% vs. 3.4% 2.6 vs. 2.8 4% vs. 4% 2.2 vs. 2.6 *-0.8 vs. -0.3 5.1 vs. 5.69% 
Core 3.9% vs. 3.9% 3.1 vs. 3.3 5.1 vs. 5.1% 2% vs. 2.3% 0.6 vs. 0.8 3.6% vs. 3.9% 
              
Consumer Confidence 106.7 vs. 110.9 *-15.5 vs.-16.1 *-22 vs. -24 39.1 vs. 38 87.6 vs. 87 92.2 vs. 92.2 
Leading Eco. Index *-0.4% vs. -0.1% *-0.8 vs. -0.7 *-0.1 vs. -0.3 110.2 vs. 108.1 *-0.1 vs. -0.3   
POLICY RATE 5.25-5.5% 4.50% 5.25% -0.10% 3.45% 6.50% 

EUROPE: The current account surplus in the euro area grew to €32 billion ($34.5 billion) in December, up EUR 22 billion surplus in the previous month.  In 2023, the current account balance posted a surplus of €260 billion or 1.8% of euro area GDP, shifting from a €82 billion deficit or 0.6% of euro area GDP in 2022.  The strong performance on the Current Account is a big positive macro particularly when you compare it with the U.S. which runs around USD 200 bio deficit annually.  This remains a big support for Euro Area macros remaining stable. 

On the cyclical side, Eurozone’s key services sector picked up to a seven-month high in February, coming at 50.2 (yes, expansion) vs. 48.4 in January, while composite index also moved closer to expansion at 49.2.   

CHINA: After China made a big move to stimulate the economy by cutting the Reserve Rate Requirement by 1% which released 1 trillion Yuan of additional liquidity to the system, they cut the 5-year loan facility rate by 0.25% (largest measure of cut) to boost the economic activity, but markets were disappointed as they looked longer term rate cut.   

INDIA: The GDP number was a massive surprise to markets and analysts, coming at 8.4% vs. 6.6% expected.  However, if you look at the GVA (Gross Value Added Product), the number at 6.5% was mildly moderating.  This is because GDP included higher tax collection as well as cut in subsidies.   

BOND MARKET: Bond market was again volatile during the month driven by alternate bouts of good and modest data from the U.S. and also influenced by frequent verbal intervention from Fed Speakers.  Broadly, yields remained capped near the recent highs on market’s belief that FED will sooner or later cut rates, though exact timing still remains debatable.   

After the initial big move lower when budget was announced in February, yields in India have remained well supported above 7% for 10 year awaiting more clues on inflation and global rate moves.   

Equity Markets 

It was a record month for many markets across the globe in February as many of them hit alltime highs, mainly driven by liquidity.  In U.S. the charge was led by big rise in AI related stocks after their numbers beat street estimates. European assets were in demand due to hopes of economy bouncing. Japanese Nikkei hit a new all-time high after 35 years (last seen in 1989 at 37887 and now new high at 40499). 

Indices 29th Feb 2024 31st Jan 2024 Abs Change % Change 
Dow Jones 38,995 38,150 845 2.22 
S&P 500 5,096 4,848 248 5.12 
Nasdaq 16,091 15,164 927 6.11 
German DAX 18,678 16,903 1775 10.50 
UK FTSE 7,630 7,630 0 0.00 
China Composite 3,015 2,788 227 8.14 
Japan Nikkie 39,166 36,286 2,880 7.94 
India Nifty 50 21,982 21,725 257 1.18 

China continued to underperform others although it did show some bounce after rate cuts and moral suasion by the Chinese authorities asking their institutions to buy shares and also restrictions on selling.  India had a rare underperformance during the month ending almost unchanged from previous month.  Technically, it has formed a DOJI candle at the multi-year top and after rising almost 200% from its Covid Lows.  Just for a comparison, it can be observed that the Chinese Market is still languishing near the Covid lows.   

Stocks seem to be trading with very rich valuations in most markets and one can expect a sudden bout of corrective fall in the coming months, quite likely in March as one heads into quarter end repatriations.   

Currency Markets 

Currency 29th Feb 2024 31st Jan 2024 Abs Change % Change 
USD Index 104.16 103.27 0.89 0.85 
EURUSD 1.0803 1.0816 -0.0013 -0.12 
GBPUSD 1.2623 1.2685 -0.0062 -0.49 
USDJPY 149.98 146.88 3.1 2.07 
USDCNH 7.2065 7.1849 0.0216 0.3 
USDINR 82.9 83.095 -0.195 -0.24 

Currencies remained mostly rangy during the month awaiting stronger clues from the Central Bankers on rate moves.  As US yields remained capped, Dollar carried slightly bearish bias except against the JPY which retested highs near 151.  However, Japanese officials promptly came out with verbal warnings on excessive moves.   

EURO was supported due to rising hopes of economy bouncing and also its strong current account surplus.  Even a rate cut by ECB eventually has been discounted.  In fact, in a survey, roughly one in five of the 75 central banks surveyed by the London-based OMFIF think-tank anticipate increasing euro holdings over the next two years, its recently published 2023 report showed. While 7% looked to decrease euro holdings, net demand was higher than for any other currency during the period and a jump from the 2021 and 2022 surveys of reserve managers controlling nearly $5 trillion (Reuters) 

Recent Rupee moves have been in the same direction as DXY although the same is of much lesser magnitude.  Flows have been strong for Indian Bonds and even restarted for equities after a lull period.   

China Yuan still trades near the weaker end of its range despite Central Bank actions to support it as foreigners have taken a sober attitude towards investing in China until the next US elections, despite valuations looking very attractive. 

Key themes/market drivers in India – 

  1. Strong growth picture continuing as per the GDP data and PMI surveys 
  2. Equity markets have been attracting fresh investments despite some expressing concerns on valuations. 
  3. Bonds attracted large flows of over USD 5 bio in this calendar year. 
  4. RBI is unlikely to cut rates until fourth quarter of this year thus keeping rupee yields attractive for inflows. 

Outlook:  Global 

The emerging view of U.S. Exceptionalism to take a backseat as more and more data is coming on the slowing side.  Eventually FED will cut rates as soon economy experiences recessionary tendency. The structural deficit of USA (Debt to GDP of 135%), fiscal deficit of 6.5% and trade/current account deficits make it vulnerable without foreign funding.  Any monetisation of debt due to lower foreigner demand will weaken the Dollar substantially.  Thus, both structural and cyclical factors are turning against the Dollar. 

Expect Dollar Index to break 102.50 in the coming days/weeks setting up a retest of 100 psychological marks.  Accordingly, EURO should move towards 1.12, JPY towards 145 and GBP towards 1.30.   

Outlook:  India 

Looking at the various macro developments in the Indian economy, one would be tempted to call it INDIAN EXCEPTIONALISM.  High growth, fiscal prudence, moderating external balances and strong flows from global investors puts India on a different plane which is already reflected in a super-strong performance of the equities.   

Inclusion of Indian Bonds in major EM Bond indices was a big recognition of India’s place, but an upgrade by the global rating agencies may be due as well.  Continue to expect a period of outperformance by the INR in the coming weeks/months as much of the good news is not in the current levels and as flows rise steadily, a stronger rally is on the cards. 

Expect 82.40 to 83.10 ranges in the coming month, but will expand to downside after the current bout of up move in the Dollar Index ends.  Financial Year end in March will add to flows and selling pressure.  However, currency policy of the RBI will be a determinant of how far it can appreciate.  It is believed they will be comfortable with modest appreciation when the Dollar Index drops to 100 or lower. 

Technical Outlook 

USDINR although continues to trade narrower but has shown interesting developments in its technical setup. The currency pair continues to experience a lower shift in its trading range slowly with resistances moving from 83.40 to 83.25, 83.15, 83.05 & recently 82.95. Weekly chart setup also shows convincing break of the months long supporting trendline in USDINR. Even the central bank influence is looking limited for the time being.  

Considering this, we can expect the down move to further stretch towards 82.55/82.45 levels while the resistances continue to be at 82.95/83.10 levels initially. Further breakdown of these supports can lead the currency pair to 82.10 levels. Current technical setup looks slightly biased towards end of months long ranged action in the currency. 

Commodity Outlook (Gold) 

GOLD: COMEX: XAUUSD: CMP: USD 2156 

Gold finally broke above the long-standing resistance zone of 2070 convincingly and continues to stay higher as against the previous break which saw retracement the same day. Bullish run in Gold to sustain with minor correction in place. Current support zone can be expected around the previous multiple tops observed i.e. USD 2070 (levels if seen should observe FOMO buying action by market participants). 

Medium term target for Gold is around USD 2300 but immediate move towards these targets are less likely for the lack of triggers (although technically the chart setups are primed for a move upwards). 

Price dips towards USD 2100/2080 to be capitalised for building long positions with stops around USD 2040 (below the yellow metal to get into ranged action again). 

The yellow metal against INR on MCX made new highs in the past few days trading above INR 65000. The recent rally has been quite one sided with no meaning full correction in the past week, thereby opening chance for corrective actions towards INR 63900/64100 levels initially. Break of INR 63800(less likely) should lead to a move toward INR 63400. On the upside the targets continue to be above INR 67000/67500 levels in the medium-term time frame. 

Prepared by: 

Mr. Jayaram Krishnamurthy, 

Co-Founder and COO – Almus Risk Consulting LLP 

Mr. Shikhar Garg, 

VP – Treasury Markets – Almus Risk Consulting LLP

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Anticipating RBI Rate Cuts Amid Global Interest Rate Trends

Economists and market participants are closely monitoring the potential timing of RBI’s rate cuts, prompted by a global decline in inflation over the past year and the Federal Reserve’s projection of three rate cuts in the current year. Initially, there was euphoria in the market, with expectations of up to six rate cuts by the Fed starting in March. However, stronger-than-expected economic data from the US, coupled with persistent inflation levels, has tempered these expectations. While acknowledging the likelihood of a peak rate, Fed and other central bank officials have pushed back against market assumptions. Market sentiment has since adjusted, with current expectations pointing to three rate cuts starting in June, with a 60% probability.

Influences on RBI’s Monetary Policy

 Amidst Governor Mr. Das’s steadfast assertion that the inflation target remains at 4%, several factors are shaping the monetary policy landscape for the Reserve Bank of India (RBI):

 1.      Tight Liquidity and Withdrawal Stance: The RBI has been implementing a policy of tight liquidity and adopting a stance of liquidity withdrawal.

2.      Inflation Target of 4%: The RBI’s CPI inflation target stands at 4% and the current CPI stands at 5.69% implying that rate cuts are unlikely unless significant adverse developments occur.

3.      Election Year Dynamics: With the backdrop of an election year, coupled with the RBI’s projection of robust growth exceeding 6.5% for FY 25, the political landscape is influencing policy considerations.

4.      Global Economic Trends: Major central banks worldwide are holding off on rate cuts, given the strength of their economies. This trend is expected to continue until the second half, with India following suit in alignment with developments in the US Federal Reserve.

5.      Commodity Price Support: Elevated commodity prices, such as Brent crude oil trading above USD 75 per barrel, are anticipated to sustain imported inflation, further influencing the RBI’s policy decisions.

6.      Growth: The recent fourth quarter GDP growth which was expected in the range of 6.50% to 7% came at 8.40%. Strong growth along with higher CPI may prompt RBI to maintain rates at the current level.

Global Central Banks Focus on Wage Dynamics and Inflation

 Apart from the factors specific to India mentioned earlier, it is noteworthy that major Global Central Banks are closely monitoring the movement or potential trajectory of wages due to its significant impact on inflation through various channels.

 Cost-push inflation occurs when wages rise, thereby increasing production costs for businesses. These heightened costs may be passed on to consumers in the form of higher prices for goods and services, particularly in industries with high labor costs such as manufacturing or services.

 On the other hand, rising wages can also bolster consumer spending power, leading to increased demand for goods and services. If this demand surpasses the economy’s production capacity, it can result in demand- pull inflation, prompting businesses to raise prices to align with the heightened demand.

 Moreover, wage increases can influence inflation expectations among both workers and businesses. If workers anticipate higher inflation in the future, they may demand higher wages as a compensatory measure. This phenomenon can trigger a wage-price spiral, wherein elevated wages lead to increased prices, subsequently prompting further wage demands.

 In general, sustained increases in wages typically exert upward pressure on inflation, particularly if productivity growth fails to keep pace.

Wage Developments in Major Countries U.S.A.

Average hourly earnings in the U.S. rose year-over-year to 4.48% in the latest data, with a January uptick following a low of 4.3% over the previous three months. Despite current wage growth reaching 5.5% from 1% in June 2022, the Federal Reserve remains concerned, aiming to temper rate cut expectations.

EUROPE

 European Central Bank (ECB) President Lagarde emphasized the ECB’s close monitoring of risk factors, including wage negotiations, which could drive inflation upwards. Wage growth in the Eurozone accelerated to 5.3% year-on-year in the third quarter of 2023, signaling mounting inflationary pressure.

JAPAN

 Japan’s wage momentum has begun earlier this year, although uncertainties persist regarding the outlook. Bank of Japan (BOJ) Chief Mr. Ueda has unequivocally tied any policy change to wage settlements. The BOJ will closely monitor preliminary Shunto (wage negotiation) results expected around mid-March, ahead of the Bank’s next meeting on March 18 and 19.

This cautious optimism reflects the BOJ’s approach to ensuring sustained progress towards its 2% inflation target. As wage negotiations unfold, their outcomes will play a pivotal role in shaping the BOJ’s monetary policy decisions and determining the trajectory of Japan’s economic recovery.

U.K.

In the three months to December 2023, average weekly earnings in the United Kingdom grew by 5.8%, marking the lowest growth in nearly two years. However, pay excluding bonuses rose by 6.2% compared to the same period in 2022. This growth occurred alongside a four per cent inflation rate for the Consumer Price Index in the same month, suggesting that wages are outpacing prices. Despite this, Bank of England Deputy Governor Ben Broadbent stated that the Bank would wait for further evidence of a downward trend in wage growth before drawing conclusions. This cautious stance underscores the Bank’s commitment to maintaining price stability amid evolving wage dynamics in the United Kingdom.

Central Banks globally are closely monitoring wage developments, delaying rate cuts if significant wage increases contribute to demand-pull inflation. This cautious approach is evident in the U.S., Europe, and the U.K., where wage growth trends are influencing monetary policy decisions.

INDIA

In the Indian context, the median salary increase is projected to rise by 9.8% in 2024, reflecting a trend close to the actual salary increase of 10% observed in 2023. Notably, the Indian Banks’ Association and unions have recently reached an agreement on a significant 17% wage hike for all public sector banks, benefiting approximately nine lakh employees. This wage revision, effective from November 2022, includes provisions for arrears covering the previous 12 months.

Assessing RBI’s rate Cut Prospects

When evaluating the prospects of a rate cut by the Reserve Bank of India (RBI), it is imperative to consider the wage developments highlighted in India, alongside other pertinent factors. While several grounds traditionally supportive of a rate adjustment by the RBI, such as a potential cut by the Federal Reserve (with significant uncertainty surrounding its timing), persisting inflation levels above 5%, and robust economic growth, do not currently lend support to such a move. The interplay of these factors underscores the complexity of the decision-making process regarding monetary policy adjustments by the RBI.

Looking at the wage developments and other factors cited above, our view is that Q4 2024 will be the earliest when we see a rate cut by RBI, with probability of the move being pushed to Q1 of 2025 being equal.

Prepared by

Jayaram Krishnamurthy

Co-Founder & COO

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BUDGET 2024 AND IMPLICATIONS

KEY TAKEAWAYS FROM THE BUDGET AND OUR VIEWS ON IMPLICATIONS

Being an Interim Budget for FY24-25, no major announcements or proposals were expected.  From this perspective, the speech was on the dot.  That way, no disappointment for any section is discernible.  Specific proposals for various industries and broader sections of the economy/society will be unveiled in the regular budget after the new Government is in place.

FISCAL PATH

The biggest positive from the budget from a macro perspective is the fiscal path outlined by the Government.

The Finance Minister has adopted an aggressive fiscal consolidation target. She has announced an FY25 fiscal deficit target of 5.1% as against the expectation of 5.3% levels. In FY24 the fiscal deficit target of 5.8% has been achieved thanks to better revenue mobilization as against the target of 5.9%. The Govt has explicit target of 4.5% by FY 26

This also means Government’s borrowing is well contained at Rs. 14.13 lakh crores vs. Rs. 15 lakh crores that economists had expected.  Net borrowings are seen at Rs. 11.75 lakh crores. Besides, as the overall economic environment is turning towards lower finance costs, the ease of raising the funds should be quite high.

What makes the plan credible is that Fiscal deficit was only at 55% of annual target till end of Q3

On the other hand, net tax revenues for the April-December period were 17.30 trillion rupees, or about 74.2% of the annual estimate, compared with 15.56 trillion rupees in the same period last year.

OUR TAKE – It is very good news and though ambitious, seems possible to achieve the target taking into our growth rate and the huge tax buoyancy.   

Lower borrowings by the Government can lead to crowding in of the private players. 

The credible fiscal plan along with undershooting last year’s fiscal deficit can lead to RATING UPGRADE.

These are very positive for the Bond Market (yields to fall) and international investor flows.  

SOCIO-ECONOMIC PROPOSALS

The Finance Minister that the government will help deserving sections of middle class to build their own houses.  Government to launch a scheme to help deserving sections of the middle class living in rented houses or slums or chawls and unauthorized colonies to buy or build their own houses.  

The government will build 20 million affordable houses in the next five years, to add to the 30 million houses built already.

OUR TAKE – The proposals are in line with the objective of inclusive growth

DEVELOPMENT PROPOSALS

The government will invest significantly in the tourism sector in the country.  States will be encouraged to take up development of tourist centres and long term interest free loans will be provided for states

Government will launch a new scheme to strengthen deep tech for defence purposes.

The government plans to set up a Rs 1 lakh crore corpus to back innovation. This includes 50 year interest-free loan, long term financing or refinancing with long tenures with low or nil interest rates. The move is aimed at encouraging the private sector to scale up research and innovations. 

OUR TAKE – These are significant initiatives which will ensure long term development and self-reliance.

INFRA FOCUS 

The outlay for infrastructure has been increased by 17% to Rs 11.11 lakh crore or 3.4% of GDP over the revised estimate of Rs 9.5 lakh crore in FY24. This is largely in line with expectations.

OUR TAKE – Higher employment and aiding growth through faster and easier mobility. Government has continued its focus seen for last several years with very good results.

TAXATION

What is the most surprising factor for many would have been the Finance Minister opting not to change any of the rates on Direct or Indirect taxes.  However, certain benefits to start-ups and tax exemptions to certain IFSC units expiring in March will be extended to March 2025.

OUR TAKE – This could have been anticipated in view of the fact that this is VOTE ON ACCOUNT and being an election year, it would raise political criticisms. 

However, as we move towards the elections, there can be some proposals that may be in pipeline to benefit the common man, particularly taking into account the high inflation.  

This is neutral for the markets.  

OVERALL, the budget should be well received by the financial markets.  Bond yields have already dropped by over 10 basis points from yesterday’s close (7.14% to 7.04% on the benchmark ten year bonds).  With positive implication for flows and possible Rating Upgrade, the Budget is RUPEE POSITIVE in medium term. 

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Monthly Outlook Feb’24

Time is your friend; impulse is your enemy – Jack Bogle

Just what the first month of the calendar year tested as it was less eventful for the markets than it usually is without hinting emergence of any new direction. Still abundant liquidity, fluctuating data points from major economies, uncertain geopolitical situation and Central Bank guidance were the focus of investors and traders trying to discern a sustainable trend.   The major themes that guided the markets were: 

  1. Inflation seemed to be attaining some stickiness and maintained a gap with the target rate which Central Banks were not comfortable with 
  2. All the major Central Banks had their policy meeting and maintained status quo as expected 
  3. No major theme emerged from the yearly Davos meet in Switzerland where the elite politicians/businessmen/analysts met   
  4. Forward guidance from the policymakers continued to push back against market’s overly optimistic expectation on rate cuts 
  5. A good number of countries are going into elections this year which kept the analysts busy assessing the prospects.  Taiwan elections saw the existing regime continuing. 
  6. The outperformance of the U.S. economy, now termed as U.S. EXCEPTIONALISM, continued while Europe did not show any decisive turn for the better   
  7. China has continued to be the laggard even with big policy move and their largest real estate company Evergrande was directed to liquidate by the Hong Kong court  
  8. Geopolitical situation in the Middle East neither escalated majorly nor showed any signs of ending.  Attacks continued from both sides in the Red Sea affecting ship movements, but did not affect the markets significantly including oil.   
  9. Indian Government presented interim budget which continued to focus on strong growth while maintaining fiscal prudence and imposed no fresh tax burdens either direct or indirect.  Due to elections, the detailed budget will be presented after the new Government assumes office.  Markets received the Vote on Account very positively.  
  10. EMs continued to be at various stages of monetary policy – Turkey hiked policy rate by 2.5% (their eight hike in as many months) to 45%, taking total hikes since June 23 to 36.5% (their inflation rate is 65%); On the other hand Brazil cut their policy rate by 0.5%, their fifth reduction since July 2023.  Rates have fallen from 13.75% to 11.25% in this period.  Other EMs maintained their policy rates unchanged.   
  U.S.A EUROPE U.K. JAPAN CHINA INDIA 
Particulars current vs. prev current vs. previous current vs. prev. current vs. prev. current vs. prev. current vs. prev. 
GDP QOQ 3.3% vs. 4.9% 0% vs -0.1% *-0.1% vs. 0 *-0.7% vs. -0.5% 1% vs 1.5% 7.6% vs. 7.8% 
              
Ind. Prod YOY 1% vs. -0.6% -6.8% vs -6.6% *-0.1% vs. -0.5% *-0.7 vs -1.4 6.8% vs. 6.6% 2.4% vs. 11.6% 
              
PMI MFG 50.3 vs. 47.9 46.6 vs. 44.4 47.3 vs. 46.2 48.1 vs. 48.7 49.2 vs. 49 56.9 vs 54.9 
PMI SERV 52.9 vs. 51.4 48.4 vs. 48.8 53.8 vs. 53.4 51.5 vs. 50.8 50.7 vs. 50.4 61.2 vs 59 
              
Jobless Rate 3.7 vs. 3.7 6.4 vs. 6.4 4.2 vs. 4.2 2.4% vs. 2.5% 5% vs. 5% 10.5 vs. 7.09 
              
Inflation 
Headline 3.4% vs. 3.1% 2.8% vs. 2.9% 4.0% vs. 3.9% 2.6% vs. 2.8% -0.3 vs -0.5 5.69 vs 5.55 
Core 3.9% vs. 4% 3.3% vs. 3.4% 5.1% vs. 5.1% 2.3% vs. 2.5% 0.6 vs 0.8 3.89% vs 4.1% 
              
Consumer Confidence 114.8 vs 108 *-16.1 vs. -15.1 *-22 vs. -24 38 vs. 37.2 87 VS. 87.9 92.2 vs. 88.1 
Leading Eco.Index -0.1 vs. -0.5 *-0.8 vs. -1.1% *-0.5% vs. -0.4% 107.6 vs 108.9 *-0.1 vs -0.3   
POLICY RATE 5.25% – 5.50% 4.50% 5.25% -0.10% 3.45% 6.50% 

In the U.S. Consumer Confidence surged strongly, but the forward looking Leading Economic Index of the Conference Board continued to drop.  The Board expects GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.  But with inflation remaining sticky and job market continuing to be strong (unemployment rate low and wages rising strongly) FED Chairman Powell said that they need more confidence on inflation sustainably falling to target of 2% before they dialled back high interest rates.  FED is also likely to discuss lowering their quantitative tightening programme in the meeting in May.  ECB and BOE also remained noncommittal on rate cut timing although they also agree that the next move will be a cut.  Markets expect rate cuts to start in all three in the second quarter of 2024.   

China made a big move to stimulate the economy by cutting the Reserve Rate Requirement by 1% which released 1 trillion Yuan of additional liquidity to the system. However, the effect of the same on the market was temporary.  China requires more structural reforms to lift the economy.  As far as Japan, consensus is that they will move out of negative rate of interest in April.  They have linked monetary policy change to wage hikes which are likely to be substantial.   

IMF’S WORLD ECONOMIC REPORT JANUARY, 2024 

IMF raised forecast for global economic growth to 3.1% in 2024 vs. 2.9% in October, keeps 2025 outlook unchanged at 3.2% and forecast global headline inflation to be unchanged at 5.8% in 2024, lowers 2025 forecast to 4.4% vs. 4.6%.  US Growth has been upgraded to 2.1% in 2024 vs. earlier 1.5%, but for Europe revised down to 0.9% from earlier 1.2%.  It lifted China GDP forecast to 4.6% in 2024 vs. 4.2% in October; leaves 2025 forecast unchanged at 4.1% 

IMF said global economy displaying ‘remarkable resilience,’ on final descent toward ‘soft landing’ while trade frictions, geo-economic fragmentation could weigh on growth.  

BOND MARKET: 

Bond yields have been quite volatile, but within a range.  Interestingly, US yields which retraced higher in early part of the month based on steadier inflation and strong jobs report, later continued to fall notwithstanding impressive GDP growth and other improved indicators.  Direction of Yields in other major countries shadowed that in US, while Japanese yields were steadily higher on expectation of a policy change.    

Bond yields in India for 10 year have since moved lower by 10 basis points to 7.04, after the Government submitted interim budget for FY25 where they projected much lower fiscal deficit target of 5.1% vs. 5.8% for FY24. Total borrowings are expected to be well manageable, particularly as we are entering an era of lower interest rates starting quarter 2 of this year.   

Equity Markets 

Equity markets have chugged along in the month of January as liquidity was still the main driver with investors looking more at the outperformance of the US Economy and Europe showing tentative signs of recovery.  The other positive factor was the expectation of rate cuts between 1% and 1.5% from the BIG THREE Central Banks.    

Indices 31st Jan 2024 31st Dec 2023 Abs Change % Change 
Dow Jones 38,150 37,689 461 1.22 
S&P 500 4,848 4,769 79 1.66 
Nasdaq 15,164 15,011 153 1.02 
German DAX 16,903 16,751 152 0.91 
UK FTSE 7,630 7,733 -103 -1.33 
China Composite 2,788 2,974 -186 -6.25 
Japan Nikkie 36,286 33,464 2,822 8.43 
India Nifty 50 21,725 21,731 -6 -0.03 

As can be seen, Japan and China had extremely contrasting performance, the former hitting new 40 year high and attracting fresh investors due to its attractive valuation while the Chinese Composite Index could not sustain any recovery despite the 1% RRR cut by the Central Bank.  Investors are looking for stronger measures by the Chinese authorities.   

India had a rare underperformance during the month ending almost unchanged from previous month.  Technically, it has formed a DOJI candle at the multi-year top and after rising almost 200% from its Covid Lows.  Just for a comparison, the Chinese Market still languishing near the Covid lows.   

The expectations are not very bullish on stocks going forward in the year 2024 due to  

  1. valuation concerns;  
  2. liquidity reduction as CBs continue quantitative tightening;  
  3. Lagged effect of hefty rate hikes impact companies’ performance and possible slowing of U.S. economy.  

Currency Markets 

Dollar recouped part of its losses of December as market looked oversold and moved higher along with recovery in yields.  Once again, Japanese currency weakened more due to its widened yield difference.  However, in the latter part of the month, it was seen the Dollar was moving in a narrower range with uncertainty about the timing and extent of rate kept moving.  It was also not surprising to see the Chinese Yuan resume its weakness as market continues to see outflows and Chinese assets are not finding any sustainable interest.  Weakness in the Chinese Yuan also kept the Asian currencies on the weaker.  

Currency 31st Jan 2024 31st Dec 2023 Abs Change % Change 
USD Index 103.27 101.38 1.89 1.83 
EURUSD 1.0816 1.1037 -0.0221 -2.04 
GBPUSD 1.2685 1.2732 -0.0047 -0.37 
USDJPY 146.88 141.04 5.84 3.98 
USDCNH 7.1849 7.1252 0.0597 0.83 
USDINR 83.095 83.24 -0.145 -0.17 

A rare outperformance by the Indian Rupee with Dollar being on the losing side, albeit by a small percentage.  Rupee was stronger despite net outflows from FIIs to the extent of USD 1 bio in January.  While there were large outflows from FIIs for stocks, it was largely offset by inflows for Bonds and other fund raising by corporate through Bonds as well as ECBs.  It was also noticeable that RBI was less active in the market.   

Key themes/market drivers in India – 

  1. Positive vibes after the state election results were carried into the month of January, helping the market to hold on to its highs 
  2. India’s merchandise trade deficit narrowed to below USD 20 bio once again, with rise in imports being offset by good increase in exports 
  3. Indian Government presented its interim budget for FY 25 with continued emphasis on infrastructure investment that helps higher growth and employment, important socioeconomic measures important for a diverse country like India, proposed no changes to the taxation rates (both direct and indirect) and planned to reduce fiscal deficit by 0.7% for FY25 
  4. Lower fiscal deficit will be taken by the global investors very positively and more importantly, global ratings agencies may even look at upgrading us 
  5. The huge positive of the budget has helped the markets to rally strongly.  Key stock indices touched their all-time high while bond yields dropped due to comfortable borrowing programme 
  6. For the first time, S&P published flash PMIs for India showing both manufacturing and services picking up further momentum and placed India at the top of the pack as far as economic activity growth is concerned. 

Outlook :  Global 

IMF expects country to grow by 6.7% from earlier projection of 6.3%.  For FY25 and FY26, India’s GDP growth is seen steady at 6.5%, a 20 basis point upgrade from its October 2023 forecast, the IMF said in its latest report released.  Of course, at 6.7% GDP growth forecast for India in FY24, the IMF’s forecast is lower than both the Reserve Bank of India’s 7% estimate and the National Statistics Organisation’s (NSO) first advance forecast of 7.3% for the financial year ending March 2024. 

The blockbuster jobs report for January from US has re-established resiliency of the economy even in the face of high interest rates.  As a result bond yields had risen and so did the Dollar through key resistance.  The question before investors is whether the FED will change their earlier plans of cutting rates by 0.75% this year due to the upbeat picture of the economy (both GDP and employment).  That will be answered in the days to come when there’s more data on inflation.  Expectations are that FED will cut rates if inflation stays subdued as high rates are eventually likely to affect growth.  Near term we look for the Dollar to recover based on attractive yields and also positioning of the market which seems to be heavily short on the Dollar. 

However, in medium term expectations are for the Dollar to weaken quite substantially as the fiscal and debt issues will be a macro headwind.  As per data, foreigner holding of US Securities is steadily declining and this means authorities will have to weaken the Dollar eventually to attract capital.   

We expect Dollar Index to move between 103 and 105.50 during the month. 

Looking at the various macro developments in our economy, one would be tempted to call it INDIAN EXCEPTIONALISM.  High growth, fiscal prudence, moderating external balances and strong flows from global investors puts India on a different plane which is already reflected in a super-strong performance of the equities.   

Inclusion of Indian Bonds in major EM Bond indices was a big recognition of India’s place, but an upgrade by the global rating agencies may be due as well.   

Expect a period of outperformance by the INR in the coming weeks/months as much of the good news is not in the current levels and as flows rise steadily, a stronger rally is on the cards. 

USDINR should remain range bound between 82.50 to 83.40 in the current month, but can expand on downside after the current bout of up move in the Dollar Index ends. 

Technical Outlook 

The ranged action for the currency pair continues although there has been a slight increase in the daily range. Several attempts at breaking the 82.80/82.90 support zone for USDINR has been seen, break of which should provide further downside action in the pair towards 82.50 although speculative buying, public sector bank buying and importer purchasers have kept the rupee appreciation limited. Upside looks well protected around 83.20 initially and then 83.40/45 levels. 

Commodity Outlook (Gold) 

GOLD: COMEX: XAUUSD: CMP: USD 2021 

Attempts at breaking above the USD 2070/2080 range have been numerous but the sustenance of the prices above has been questionable by far. Although the metal is bullish in it’s underlying trend over the 3-6 month horizon the prices action has been of consolidation in the past couple of weeks. The precious metal is expected to move upwards as conviction of rate cuts during the year by FED increases and real yields decreases. Targets in the longer term stay at USD 2200/2300 levels initially. Supports around USD 2005 initially and later at USD 1970 for the month can be observed break of which the metal can again set into a consolidating move for some more month. 

The yellow metal against INR on MCX also moved sideways in the previous month with bias for bullish action while USDINR component keeping volatility limited. The charts suggest a channel break is required for significant action on the upside thereby putting initial resistances around INR 63250 and INR 64150. Break above these levels shall bring in bullish action targeting INR 67500 above. 

Supports around INR 62000 and INR 60300 should hold any downside push during this bullish rally expectations. 

Prepared by: 

Mr. Jayaram Krishnamurthy, 

Co-Founder and COO – Almus Risk Consulting LLP 

Mr. Shikhar Garg, 

VP – Treasury Markets – Almus Risk Consulting LLP

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2024 – Year for Democracy & Central Banks??

“Two roads diverged in a wood … I took the one less travelled by, and that has made all the difference.”       – Robert Frost 

The quote does talk about two roads diverging, but for few of the major central banks its just one with a question on timing of when to begin the journey on the road. 2024 looks set with a series of major events for the financial markets with numerous random & uncertain changes at fore, difficult to predict. Yet we tend to engage in this activity of outlining the probable outcomes. Quite interestingly it can definitely help provide a map to taking into consideration major narratives to traverse through this maze with some guidance in the background. Considering this following are the narratives expected to be at play for the next few months of 2024. 


Democratic Abundance! 

More than 30 democracies are scheduled for elections in 2024 with larger nations like India, US & Indonesia also contesting. Although discussions around stability of govt. and re-election of the incumbents for the Indian nation have gained prominence over the last couple of months, it’s the US elections which are seeing quite interesting set of developments. Volatility which was bit subdued during the end of 2023 should see some pick up in the current year with further more developments in the political landscape. 

 
 
 
 
Central Bank Conundrum! 

Steadily falling inflation and slowing economy has prompted FED to turn dovish on monetary policy and the dot plot indicates up to 0.75% rate cut in 2024.  Since then, market expectation of rate cuts has risen to 1.5% this year.  Rate cuts of this magnitude can happen only in case of a financial crisis or a big slump in the U.S. economy.  What FED is trying to achieve is a soft-landing and avoid a recession in a crucial election year. At the same time, they would not like to ignite fresh rise in inflation by hefty rate cuts (unless necessitated by a crisis).  

Central banks have repeatedly impressed on their dependency to data for their actions leading to participants closely following the labour markets, wage growth and the numerous variations of inflation indicators. Concerns around the impact of recent rate hikes not being seen thoroughly places attention towards the debt refinancing and maturity in the shorter term – to identify the possibility of further slowing of economy. 

Though 20 major central banks are expected to cut rates this year according to economists – central banks still weary a repeat of 1970s i.e. cutting rates prematurely leading to second round of inflation – thereby keeping pace slower than expected. 

 
 
The global financial markets would see a lot more of other factors like China performance, Euro zone recovery, Geo-politics and other thing – but it’s the policy & the politics which is expected to set the general trend for the year.  
   
USDINR   

India was once assumed to be a key member of the ‘Fragile Five’ with many major banks terming it to be one of the vulnerable emerging economies. Recent discussion seems to have quite a distinguished view for the nation compared to the ones mentioned earlier. India has been one of the hotter destinations for the flows to have arrived along with consistent expectations of outgrowing global economies in terms of pace in the coming years. 

Expect Rupee to perform better in first two quarters due to: 
Huge inflows expected to the Bond market 

Current expectation of stable Government returning to power in May likely to boost investments 
FDIs – which have been underwhelming in 2023 is expected to pick up as India continues to grow faster and stable government attracts long term investors 

Dollar Index is expected to be soft into the CY Q2 considering expectation of Fed Rate Cuts 
Lower oil prices are expected to sustain which shall help keep the nations external deficits at manageable levels 

 

Expect Rupee to weaken in second half of the year due to: 

Dollar Index is expected to gain once FED cuts rates, but expect them to undershoot market expectations 
India’s high growth will keep imports on the higher side and persistent deficits will necessitate keeping the Rupee weaker 
RBI expected to cut rates in the second half of the year; this should weaken the Rupee 
Indian assets are expected to see some correction with valuation concerns dominating 
 
 

INR historically weakens 3 – 3.5 % p.a. on average in a longer-term horizon due to its structural deficit.  This did not happen in 2023 due to RBI arresting it with inflation concerns. Although INR is expected to appreciate in the first two quarters, it’s the consistent imports, slowing economies revaluation of assets and dollar strength which may bring in depreciation for the Rupee by the end of calendar year. 

 

TECHNICALLY, initial down move can see the Rupee hit Rs. 82.00 or Rs. 81.50 levels against the dollar.  
The subsequent weakness can be expected to move it higher towards Rs. 84.50 levels towards year end.   
 
Dollar Index 

If the US economy does achieve a soft-landing while at the same time market expectation on rate cuts is moderated, it will support the Dollar by making investments in the U.S. assets attractive.  As mentioned earlier – the U.S.  goes through elections this year with a lot of uncertainty as to which political disposition will have the edge Given this background, expectation of the Dollar moves during the year- Dollar is expected to weaken further into the Fed rate cut beginning Slowing of the economy should further put pressure on the strength for dollar  As their actual actions undershoot market expectations, can expect Dollar to regain strength later Lingering geopolitical uncertainty and continued strain in U.S. China relations will keep the global trade on uncertain footing.  This will be supportive of the Dollar as a SAFE HAVEN Policy uncertainty due to upcoming elections in the U.S. will be detrimental to risk assets globally Thus, initial period of Dollar weakness should give way to Dollar strength in the second half of the year.   

 

MEDIUM TERM: However, medium-term view of Dollar is one of more weakness due to (a) precarious fiscal situation in the U.S. which will eventually lead to a depreciation of the Dollar; (b) ongoing diversification or de-Dollarization of the Dollar is an underlying factor to keep the greenback weak. 

TECHNICALLY, initial weakness will see the Dollar Index drop to 98.00 or slightly lower.  However, after that it is expected to have a rebound to 105/107 levels.  In other words, a drop in Dollar by another 4% from the current level of 103 should be followed by a strong corrective rebound.   EURO Broadly Dollar moves are determined by the trends in EURO which has maximum weightage in the DXY.  EURO has displayed distinct bullishness since the low of 0.9535 seen in September last year.  It can be gauged from the fact that all through 2023 and till now, EURO Zone economy has underperformed the US counterpart and its yields have been lower than that of U.S.  The largest Euro Zone economy, Germany has seen a technical recession while the Region as a whole has recorded a negative growth in Q3.   

Euro has derived its strength from Central Bank diversification of reserves and also structural short position in the single currency being unwound.  EURO’s gain of 1.6% on a YOY basis does not look significant, but its recovery of over 15% from the multi-year low speaks of the massive short-covering that investors have done.   

Another factor supporting the Euro has been that while the FED has gotten dovish recently, ECB still remains glued to HIGHER FOR LONGER rates notwithstanding the weak growth picture.  However, this is likely to change in the coming months as inflation in the Euro Zone has been falling faster and it is a matter of time ECB turns dovish too.  In fact, markets have been discounting over 1% rate cut during the year for EURO starting in the second quarter of 2024. Once the ECB starts to align with the market, EURO reversing some of its gains can be expected.  Elections in some of the member countries, viz. Austria, Belgium and Portugal, even as political set up in other countries are not very strong can bring in some volatility.   Even the European Parliament is set for elections this June.  

TECHNICALLY, EURO has an upside potential to 1.1250 or even 1.1500, before it retraces towards 1.05 in correction.  However, medium term outlook for EURO is strong.   

Sterling Pound/GBP: 

Just like the EURO, UK Pound benefitted from the market’s structural short position being unwound and it posted even better grain of 3.5% on YOY basis.  The massive short position in Pound was the reason why market ignored the weak performance by the economy, although the big rise in interest rates and the restoration of fiscal credibility were reasons too.  Recently, inflation in UK also dropped quite heavily (from peak of 11.1% in October 2022 to 3.9% in November 2023), after which slightly dovish voices from the Bank of England members were heard.  Market expects the Central Bank of UK to start cutting rates in Q2 of this year, though the Bank continues to push against such expectations.   
UK also goes into general elections in next one year, although Prime Minister Rishi Sunak is not obliged to call an election until 17 December 2024, exactly five years since the last one took place.  After many years, the incumbent Government has to deal with many issues like rising cost of living, high inflation and record interest rates, while the latest data shows GDP contracting in Q3.   
Given this background, UK Pound is in for a period of underperformance both against the USD and the EURO in the coming year, though it will generally track the fortunes of the broader Dollar.   
Technically, Pound will find it difficult to gain beyond 1.32 this year, while subsequently a drop towards 1.20 is not ruled out tracking the Dollar strength.   

The Japanese Yen 

Yen is likely to strengthen in the year due to-  FED’s dovish posture resulting in rate cuts;  gradual reversal of easy money policy by the Japanese Central Bank;  Unwind of carry trades as other Central Banks like ECB and BOE cut rates later in the year;  Japanese markets possibly outperforming an attracting foreign funds into the country Monetary policy change in Japan is overdue as their inflation has stayed well above target for long and expected to inch up further as wage revisions take place.  BOJ has also linked their policy change to rise in wages.   

Technically, dip towards 136.70 or even 133.70 appears likely as in a large correction to an uptrend. The quarterly chart’s structure suggests that a dip to 130.75 is also not ruled out. Resistance near 149/153 to cap any upside attempts by USDJPY.  

The Chinese Yuan 

Chinese Yuan was a stark underperformer in 2023, weakening as much as 5.5% against the USD.  Main drivers were the widening rate differentials with the U.S. (FED raising rates and China cutting rates), sharply weakened Chinese Economy, large outflows from investors and fall in their exports on YOY basis by 2.5%.  However, due to persistent efforts of Chinese authorities, weakness into new lows was averted and the currency recovered towards close of the year with some green shoots observed in the economy.  Although China’s equity composite index probed new lows in the beginning of 2024.  
Outlook for the Chinese economy is better for 2024 as lagged effect of various policy moves and supports start to reflect.  Barring a slump in global trade, worsening of their relations with the U.S. and geopolitics China should see better year and that will be seen in the currency as well.   

One alternate scenario for China cannot be ruled out.  As we all know, China disappointed with its recovery vis-à-vis expectations post Covid relaxations.  Despite the many measures taken by the Government/Central Bank, the economy and the markets have failed to respond positively.  Following points are notable- Chinese Shanghai Composite is near Covid lows in stark contrast to global composite Index which has almost doubled FDI into China fell into negative territory last year for the first time since records began in 1998 Chinese Yuan fall of over 7% matched that of the Yen which carries negative policy rate  whereas the DXY itself was lower by nearly 2%.   

 

The problems in Chinese economy are structural in nature rather than being cyclical.  Hence, it is another probable situation that China may adopt a bold move to cut their rates big and allow the Chinese Yuan to fall (which they have been resisting so far).  In such case, Yuan can fall to 7.50 or more against the USD.   
Technically, charts show that the underlying uptrend could undergo a correction by dipping towards 7.02 (minimum) or even to 6.85 area in the coming 6 to 12 months’ period. Resistance is near 7.22/7.28 and a farther one at 7.34/7.37. Rise above 7.37 shall bring in another round of weakness for the CNH against the dollar. 
 
GOLD 

The precious metal has performed strongly in 2023 rising 7% on YOY basis, helped by falling inflation rates across economies, policy rates expected to be slashed by the FED, consistent Central Bank accumulation of gold and Dollar diversification.  This trend is likely to continue into 2024 as other major Central Banks in UK and Europe get dovish and cut rates.  The structural weakness of USD due to their extremely weak fiscal position adds to attraction of gold.  Further compression in real yield would further boost the overall attractiveness for the yellow metal. 
 
Technically, charts continue to appear bullish for a rise to 2250. Supports are near 1980/1970 and a deeper one is at 1920. Fall below 1920 would lessen the chances for the expected rise. Sustained break above 2080 USD means that gold has ended its 12-year consolidation phase (1920 was seen in September 2011) and coupled with break of FOUR TOPS AT 2070-80 RANGE could lead to big gains for the metal.   

Conclusion: To sum things up – Geo-politics shall play a important role in adding uncertainty to the financial markets this year. Central banks would try sail the ship through this uncertainty of geo-politics, historically instances of another round of inflation, slowing economy and heavy fiscal situations. 
The expectations mentioned in the report are expected to help navigate in the next couple of quarters with further guidelines & directions to be evaluated over time. 
 
Prepared by: 
Mr. Jayaram Krishnamurthy, 
Co-Founder and COO – Almus Risk Consulting LLP 
 
Mr. Shikhar Garg, 
VP – Treasury Markets – Almus Risk Consulting LLP

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