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. 

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

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

RBI MONETARY POLICY Update (08th Dec 2023) 

As expected, the MPC kept all the policy rates unchanged and retailed the monetary policy stance as one of “withdrawal of accommodation” 

GDP:  

Growth expectation for FY 24 upped to 7% from previous 6.5%.  This was to be expected after the strong growth momentum we observed in Q2 number announced last month.  The Governor also pointed out that private consumption should gain support from gradual improvement in rural demand.   He also said that drag from external demand should also moderate.  These should be a boost higher growth too. 

Inflation: 

RBI kept their inflation expectation for FY 24 unchanged at 5.4% in the background of uncertain food prices as well as RABI sowing as well as global sugar prices that have remained elevated.  This is despite the recent big fall in global crude prices as the Central Bank takes into account the fact that crude oil prices are very volatile and with further output cuts it may rise again. 

Forward Guidance: 

Governor’s statement that inflation target of 4% is yet to be reached and that they have to stay the course indicates that the monetary policy will remain tight and we can expect no change in rates for now.  They are also not swayed by expectation in global markets about US and European rate cuts next year and they would like to observe how things evolve vis-à-vis expectations. In our view, any cut in rates can happen only in Q2 of FY 25.    

EXTERNAL SECTOR AND RUPEE:  

Governor’s comforting statements about external sector being manageable and rupee’s stability and low volatility compared to the peers is not surprising.  We do agree that rupee has stayed stable even as we have observed big swings in other global currencies which have reflected stronger domestic fundamentals rather than reacting to global volatility. 

Reserves at USD 604 as on December 1st is a good retracement, but no mention is made about the forward book of RBI (which we feel is reduced to a great extent now).  We will get the picture of the combined book spot and forward reserves from the next monthly bulletin of RBI. 

LIQUIDITY MANAGEMENT:  

The Governor said that the net position under the liquidity adjustment facility (LAF), which measures system liquidity, entered deficit mode for the first time in September 2023 following a nearly four-and-ahalf-year break since May 2019.  The overall tightening of liquidity conditions is attributed mainly to higher currency leakage during the festive season, government cash balances and Reserve Bank’s market operations. Keeping in mind that their stance of liquidity withdrawal was automatically achieved under the above conditions, RBI did not conduct any OMOs announced in earlier meeting.  This also means that RBI keen to maintain liquidity prudently and flexibly in balance and not to allow higher surplus or deficit.   

CREDIT CONTROL:  

The Governor reiterated its pro-active approach in managing risks in banking sector due to lending, referring to their action in November of increasing risk weights on unsecured consumer credit exposures of banks and NBFCs (including credit card receivables) as well as bank lending to NBFCs, other than housing finance companies (HFCs). The regulated entities had also been advised to put in place Board approved limits for various sub-segments under consumer credit, specifically unsecured consumer credit. 

REVIEW OF THE REGULATORY FRAMEWORK FOR HEDGING OF FOREIGN EXCHANGE RISKS – Governor’s speech made an important announcement on markets as under. 

The regulatory framework for foreign exchange derivative transactions was last reviewed in 2020. Based on market developments and feedback received from market participants, the extant regulatory framework for forex derivative transactions has been refined and consolidated under a single master direction. This will further deepen the forex derivatives market by enhancing operational efficiency and ease of access for users. 

We expect more relaxations for large corporates to hedge themselves in the market.  We shall revert to you as and when the directions are issued.   

OUR VIEWS:  

The forex implication of the policy is almost NIL except that it can be seen as continued vigilant approach of the Central Bank keeping both growth and inflation in mind, which is laudable.  

As for the policy rate is concerned, as growth remains robust and inflation uncertainty abounds, it is very unlikely that the RBI will go for a policy rate cut before 2nd quarter of FY25, even if other major central banks do cut in line with current market discounting.  However, the Indian bonds will continue to attract flows due to (1) its high nominal yield; (2) expectation of large funds allocated on account of inclusion of Indian Bonds in Global Bond Index.  

Monthly Outlook Dec’23

The month of November can be described as the month of great deceleration globally which was a relief to all stake-holders – policymakers, investors and general public.  Inflation, which had been falling in the past few months, got some momentum on the downside and came lower than expected in most major economies.  This meant that the policy rate hikes that Central Banks had done over the past 18 months had their desired effect though with a lag.  However, while the markets took the development with both hands and rallied across all segments, Central Bank speakers continue to adopt a cautious line and were pushing back against market expectation of timing & extent of rate hikes in the year ahead as they were not yet ready to declare victory over inflation.  

Disinflationary Trend (Annual Cpi %)

CountryNov-23Oct-23Peak in cycle
U.S.A.3.23.79.2
EUROPE2.42.910.6
U.K.46.711.1

However, a note of caution on assuming continued deflationary trend is warranted.  Base effect was favouring lower indices in some countries and it was also helped by the sharp fall in energy prices which remain volatile and one cannot rule out a spike up with deliberate supply reductions through output cuts by oil producing countries.  Another factor to be borne mind, which some FED members have been hinting at is that the easing of financial conditions and risk asset rallies (which create wealth effect can once again push up demand led inflation through higher consumption).   

Global Economies

We saw refreshing news of some stability in economic updates from both China and Europe during the month, while U.S. economy continued to throw up mixed data.  But on the overall growth rate, U.S. won the contest hands down as the second estimate of GDP for July-September quarter came at 5.2%, beating forecasts of 5% and previous quarter growth rate of 2.1%.  Total output of goods and services grew at its fastest rate in nearly two years.  Consumption, which accounts for 70% of the US economy rose 3.6% annual rate and Government spending rose 5.5% on annual basis, both of them accounting for the big rise in the GDP.  In contrast, Europe continued to struggle with a growth rate of 0.1% vs. previous estimate of -0.1%, while UK recorded a flat growth for the quarter.  In Europe both Germany and France recorded negative growth rate of -0.1%.  

EU actually cut Eurozone 2023 GDP forecast to 0.6%, down from a Sep forecast of 0.8%.  UK saw the flash reading of composite index jumping to expansion territory at 50.1 from 48.7 in October. 

The reading indicated a stabilization of UK private sector output after marginal reductions in the previous three months. 

CountryU.S.AEUROPEU.K.JAPANCHINAINDIA
Particularscurrent vs. prevcurrent vs. previouscurrent vs. prev.current vs. prev.current vs. prev.current vs. prev.
GDP QOQ5.2 vs. 2.1%-0.1 vs. 0.2%0 vs. 0.2%-0.5 vs. 1.1%4.9 vs. 6.3%7.6 vs. 7.8%
Ind. Prod YOY-1.7 vs. -0.9(5.1) vs. (2.2)0 vs. -0.5%-4.4 vs. -4.44.6 vs. 4.5%5.8 vs. 10.3%
PMI Mfg.49.4 vs. 5043.8 vs. 43.146.7 vs. 44.848.1 vs. 48.749.4 vs. 49.556 vs. 55.5
PMI Services50.8 vs. 50.648.2 vs. 47.850.5 vs. 49.851.7 vs. 51.650.2 vs. 50.658.4 vs. 61
Jobless rate3.9 vs. 3.86.5 vs. 6.54.2 vs. 4.22.6 vs. 2.75 vs. 5.210.5 vs. 709
Headline Inflation3.2 vs. 3.72.4 vs. 2.94.6 vs. 6.73.3 vs. 30 vs. 0.14.87 vs. 5.02%
Core Inflation4.1 vs. 4.33.6 vs. 4.25.7 vs. 6.12.9 vs. 2.80.8 vs. 0.84.2 vs. 4.6%
Consumer Confidence102 vs. 99.1-16.9 vs. -17.9-24 vs. 0-3036.1vs. 35.7 92.2 vs. 88.1

Japanese Economy 

Shrank at its fastest annualized quarterly pace in two years in the July-September period, as rising domestic inflation weighed on consumer demand, adding to export woes as demand waned.   In China, Data on Industrial Production and Retail Sales showed improvement for the second successive month adding to optimism of the second largest economy recovering. However, even so, the real estate downturn continued to drag down investment in fixed assets. Jobless rate was stable at 5% but there was no update on the youth unemployment rate, which hit a record high of 21.3% in June.

A general improvement in the manufacturing is observed although some economies still have a contraction.  In Germany, for instance, industrial production dropped once again in September for the fifth consecutive month and Industrial production is now more than 7% below its prepandemic level, more than three years since the start of Covid-19.   Employment component of the PMIs is weakening too, which is good news for the doves.  

Housing Sector Remains Depressed 

U.S. existing home sales dropped to the lowest level in more than 13 years in October as the highest mortgage rates in two decades and a dearth of houses drove buyers from the market.  Barring a rebound in November and December, home re-sales this year are on track for their worst performance since 1992.

Bond Market

Bond Markets had their best month since 1980s sparking Cross-Asset rally.   In a year in which little has gone right in the US bond market, November turned out to be a month for the record books.  Yields plunged across economies with initial reaction coming to the weak unemployment report from USA and got downward movement after inflation rates were seen much lower than previous months.  Even the leading indicators across economies showed a downward trend sparking expectation of early rate cut by the FED and ECB.   

Tenor2 Year10 Year
COUNTRYCurrentPrev. monthCurrentPrev. month
U.S.A.4.55%4.73%4.33%4.92%
GERMANY2.81%3.07%2.45%2.81%
U.K.4.59%4.79%4.18%4.52%
JAPAN0.04%0.16%0.68%0.95%
INDIA7.26%7.32%7.28%7.35%

As can be seen most countries saw lower yields as markets expect Central Banks to start easing rates much earlier.   According to Fedwatchtool fed will cut rates by at least 0.25% as early as May 2024 (some even predicting March 2024), while in Europe rate cut is expected in April.  Both Central Banks are expected to cut rates by up to 1% next year.  The expectation of rate cut in UK is much further down the line as their inflation is still far higher than the target rate of 2%, though it has fallen substantially in recent months too.  China is still on easing path to support the economy as their inflation is still low while investors are speculating on when the Japanese Central Bank will start raising rates (current expectation is for April 2024). 

Equities

Yield plunge spurred advance in stocks, credit and emerging markets. Investors see scope for more gains with Fed cuts on horizon. Investors frantically bid up the price of shares igniting a powerful pan markets rally.   

MARKET1st Nov 20231st Dec 2023Change% Change
DOW JONES33,08136,4253,34410.11
S&P5004,2054,5933889.23
NASDAQ12,88714,3051,41811.00
GERMAN DAX14,85116,3971,54610.41
UK FTSE7,3217,5292082.84
CHINA COMPOSITE3,0383,031-7.0-0.23
JAPAN31,31133,4312,1206.77
INDIA NSE19,06420,2671,2036.31

It is observed that equity volatility has fallen to multi-year lows (indication of complacency) with investors chasing stocks aided by abundant liquidity without regard to valuations.  

Currencies

It was a weak month for the Dollar with DXY recording a sizeable fall of more than 3% with EURO and GBP making handsome gains, followed by Chinese Yuan, Yen and AUD.  

CURRENCY1st Nov 20231st Dec 2023Change% Change
Dollar Index106.67103.27-3.40-3.19
EURUSD1.05771.08810.032.87
GBPUSD1.21501.27000.064.53
USDJPY151.31146.81-4.50-2.97
USDCNY7.327.14-0.18-2.42
USDINR83.2783.26-0.01-0.01

Fall in the Dollar was the direct result of US Yields falling and rising expectation of early rate cut by the FED.  U.S. economy softening adds to these expectations, notwithstanding the GDP of 5.2% in Q2 which was ignored by investors, being a backward-looking data. Falling yield helped Yen to recover too which was a surprise, given the super-easy policy pursued by the Japanese authorities and promising to do more if economy required. At the same time, they kept voicing concerns on Yen weakness hinting at action. However, USDJPY fell without an actual intervention. The other surprise came when USDCNY fell nearly 3% which had twin reasons – economy showing tentative signs of stabilizing in some sectors and fall in US Yields narrowing the differential with China. The meeting between the Chinese Premier and President Biden on the sidelines of APEC meeting in U.S. was another trigger as markets perceived their meeting as a positive development.

Indian Economy and Markets 

Indian economy continued to show its superior placement in the global picture.  July-September GDP came at a forecast beating 7.6% (expected 6.8%) aided by higher consumption, manufacturing expansion and higher Government spending.  The buoyant growth was underpinned by cyclical factors like robust corporate profits, a strong fiscal impulse, with government spending being front-loaded in a pre-election year, and a boisterous financial sector.  This reading presents some upside to FY24 GDP, but growth is likely to moderate in the coming quarters as consumption growth is likely to slow post the festive season, and some slowdown in credit growth also expected.  

Inflation moderated further, helped by drop in vegetable prices and some favorable base effect.  It is likely to remain volatile due to big influence from food prices.  Due to Government subsidy fuel inflation trended lower.  While the inflation has been within the overall band of 2-6% mandated to the MPC, RBI Governor has recently reiterated that 4% is what the Central Bank is focused on.  Meanwhile, the WPI index continued to show deflationary trend.  

With growth remaining strong, we expect MPC to remain on vigilant mode and keep policy unchanged and maintain the stance of withdrawal of accommodation.  

India’s merchandise trade deficit hit a new all-time high of USD 31.46 bio, vs. forecast figure of USD 20.50 bio.

Particulars Oct-23Sep-23Oct-22
MerchandiseExports33.5734.4731.60
Imports65.0353.8457.91
ServicesExports28.7029.3725.30
Imports14.3214.9131.51
Overall Trade (Merch. + Serv.)Exports62.2663.8456.90
Imports79.3568.7571.42
Net Trade Balance -17.09-4.92-14.52

                                                                                                                  All figs. In USD Bn

As can be seen from the above tables, deficit has been higher both on a YoY basis and MoM basis and even the net deficit (Merchandise + Services) shows a jump of over USD 12 bio compared to September.  Major contributing factor for the big rise in deficit is gold imports which rose by 95% during October (with festival season demand impacting) and the rise in crude prices since September which is reflected in October deficit.  While exports have actually dropped slightly, imports have surged by USD 11.18 bio.  On YoY basis, however, exports have shown an increase both on merchandise and services.  

Indian stocks gained over 6% during the month, helped by higher GDP growth and a strong rally following the state election results.  

Despite various positives going for the economy, the INR remained on the weaker side as strong demand unmatched by supplies from flows, kept the upward pressure on the Dollar.  The recent improvement in global factors like fall in US Yields, USD index falling, improvement in China Yuan and lower oil prices have not helped Rupee to move away from its weakest levels.

Surprisingly, the good GDP number last week and the state election results which indicate a possible stable government formation in next general election has also been ignored by the Rupee.  At the same time, upside of the USD has also been limited due to the persistent intervention from RBI.  

Outlook

Global markets have seen good two-way volatility during the year in all segments (yields up and down, stocks down and up while the Dollar has seen alternating bouts of bullish and bearish plays.   As we step into the last month of the calendar year, the volatility is expected to decline with a lot of suspense regarding the Central Banks’ monetary policy approach in response to the fall in inflation and weakening economies.  In the past, we have seen that rate cuts happen when there is a systemic crisis or when the economy slumps big.  Hence we expect Central Banks to maintain their neutral and data dependent tone for some more time.

Going forward, the fiscal situation of the U.S. is likely to become a big headwind for the global markets as their deficit has risen by 23% this year. US debt interest bill has also rocketed past $1tn a year. It’s 4% of annual US GDP having doubled in 19 months. It is equivalent to 16.3% of the entire Federal budget for fiscal year 2022.   While the heavy borrowing due to the same keeps the yields supported, in medium term this may result in a big depreciation in the value of the Dollar.  

Taking note of the severe fiscal situation of the US government, Moody’s Investors Service signalled it was inclined to downgrade the nation because of wider budget deficits and political polarization. The rating assessor lowered the outlook from stable while affirming the nation’s rating at AAA, the highest investment-grade notch. Amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability,” Moody’s said.  This did not have an immediate impact on the markets as FITCH another rating agency had already done it back in May this year.  However, it does have a negative medium term implication and add to a depreciation tendency for the Dollar.   

Indian Rupee Outlook

State election results – encouraging for investments 

The final results of the elections announced for four of the five state assemblies that went to the polls declared on 3rd December did spring a surprise which can turn to be a positive for the Indian financial markets including the Rupee.  The BJP which was expected to win only one State out of the five, run a close contest in another and lose the remaining, ended winning three of the four with clear majority.  This has not only beaten all forecasts (just like many of the US economic numbers have been) but has significance for the political development in the next few months when Parliamentary elections will be held.  Going by the current popular support, the ruling party at the centre could do well and ensure a stable government for third time running, which will be a huge positive for the investors.  

Global investors who had been holding in check much of their investments in last few months in view of the possible uncertain political situation would heave a sigh of relief at these election results.  A positive view taken by them can result in fresh inflow of funds into the Indian market, and more importantly to the FDIs that will relieve a lot of pressure on the Rupee which may actually start to strengthen.   

In the short term, however, rupee is likely to remain under pressure due to lack of flows and higher deficits.  

Technical Outlook

USDINR

The range for the currency pair continues to narrow, although with a new high due to technical glitch once. The pair as long as continues to trade in the range 83.00 and 83.40 should be looked as the range extremes and suitable actions around these levels should be taken for risk management purposes.

Commodity Outlook (Gold)

GOLD: COMEX: XAUUSD: CMP: USD 2025

Gold broke above its all time high, resisted thrice earlier in the past 3 years (USD 2070), in a thin early Asian market with less liquidity. The prices then corrected in its follow through during the day with profit taking actions in sight. The metal gave up gains during the day to close back below the USD 2070. 

The metal is expected to remain bullish in as the US Real Yields start to decline again, making way for the metal to rally. Buy on dips can be the suggested action for gold with a rise in the uncharted territory to be seen again during the month.

Supports around USD 2000 and USD 1960 to hold any downside action for the month. The metal is expected to move upside with eventual targets around USD 2260 and USD 2300 in the next 36 months’ timeline.

Even against INR, the precious metal made a new all-time high breaking above 61850 levels in the last week sustaining well above these levels. Support for the commodity against INR is expected around INR 61,250 and then around INR 59,600 (less likely to see prices beyond these levels). 

The expectations primarily continue to be bullish for new highs to be seen in the coming few months. Initial resistances are expected to be at INR 64200 although this is further expected to be broken for a next move towards INR 68,300 levels in the next 3 months.

The break of ATH and decrease of Real Yields have most likely kickstarted a new bull run for the precious metal in the longer time frame.

Monthly Outlook Nov’23

Macro Update

The past month had a negative surprise of sudden eruption of war in the Middle East which impacted markets to a great extent, but subsided gradually as it has so far not escalated into a larger conflict.  In an act of terrorism for which Israel was totally unprepared, on October 7th 2023, thousands of armed military wing members of Hamas tore down large parts of the Gaza security fence using tractors, RPGs and explosives and invaded southern Israel. Simultaneously, Hamas military wing in Gaza fired thousands of rockets toward Israel.  Over 1,300 civilians were murdered, and over 200 were abducted. The Hamas military wing briefly took control of about 10 Israeli towns, terrorizing and brutalizing their residents. Israeli Defence Forces (IDF) forces operated to neutralize this military wing and thwart their infiltration; however, they were also ambushing IDF bases, killing soldiers and hurling grenades and explosives. The State of Israel has never encountered such a large-scale, calculated attack on the Gaza front. Hamas stated that their initial attack was due to the occupation of West Bank by the

Israelis.  

Israel which was in a state of shock due to unanticipated attack, responded very strongly, mobilized 300000 reserves and attacked with a barrage of airstrikes that have decimated the Gaza Strip, leaving more than 350,000 residents displaced and their defense minister ordering a “complete siege” of Gaza Strip cutting electricity to the region and blocking fuel and food from entering the territory from Israel.  PM Netanyahu vowed to demolish Hamas.  The casualties on Palestinian side is reportedly around 8000. The whole world was in a state of shock looking at the number of civilian casualties and human sufferings and called for cessation of the attacks and for ceasefire, but Israel has continued with their ground attack which has so far been limited.  Almost no one wanted an escalation of the war, particularly involvement of larger Arab countries like Iran which can then take the conflict to a global level.  It is believed that Iran helped Hamas’ attack on Israel for several weeks before October 7th.

Global Market’s Reaction:

There was a big impact on the global markets with stocks falling, Dollar rising, bonds being bought as safe haven and gold making a big stride.  However, even attacks reduced somewhat markets have settled down (believing that global efforts to de-escalate will succeed) and started re-focusing on the economy and monetary policies.  However, we are not certain that things will settle down completely easily and there will be simmering violence that will keep geopolitical situation on the radar of markets for a long time. 

GLOBAL ECONOMIES: 

Even as HIGHER FOR LONGER in interest rates remained the policy of most Central Banks, economies started/continued to show slowdown as tight financial conditions and unaffordability affected consumption and activities.  However, on a relative basis, U.S. economy was still quite strong where consumption continued to support although cracks seem to be appearing there as well.  Euro Zone showed negative growth on QOQ basis but on YOY basis grew just 0.1%.  UK showed 0.2% growth on QOQ basis, but the Central Bank forecasts showed growth headed for a sharp slowdown.  Inflation was seen easing across the major economies supporting the PAUSE in rate hikes by the respective Central Banks.  US grew 4.9% beating forecasts which were at 4.3%.  China seemed to be starting stabilize responding to various measures initiated by the Government, but it is too early to conclude they have turned the corner.  India confirmed its fastest growth and lowered inflation, but activity surveys indicated slowdown. 

 U.S.AEUROPEU.K.JAPANCHINAINDIA
Particularscurrent vs. prev.current vs. prev.current vs. prev.current vs. prev.current vs. prev.current vs. prev.
GDP – QoQ (%)4.9 vs. 2.1(0.1) vs. 0.20.2 vs. 0.31.2 vs. 1.54.9 vs. 6.37.8 vs. 6.1
Ind. Prod. – YoY (%)0.1 vs. 0.1(5.1) vs. (2.2)1.3 vs. 1.0(4.6) vs. (4.4)4.5 vs. 4.510.3 vs. 5.7
PMI Mfg.50.0 vs. 49.843.1 vs. 43.444.8 vs. 45.248.7 vs. 48.549.5 vs. 50.655.5 vs. 55.7
PMI Service50.6 vs. 50.147.8 vs. 48.749.5 vs. 49.351.1 vs. 53.850.4 vs. 50.258.4 vs. 61.0
Jobless rate (%)3.9 vs. 3.86.5 vs. 6.44.2 vs. 4.12.6 vs. 2.75.0 vs. 5.210.5 vs. 7.09
Inflation – Headline (%) 3.7 vs. 3.72.9 vs. 4.36.7 vs. 6.73.0 vs. 3.20.0 vs. 0.15.02 vs. 6.83
Inflation – Core (%)4.1 vs. 4.34.2 vs. 4.56.1 vs. 6.22.8 vs. 3.10.8 vs. 0.84.6 vs. 4.8

MONETARY POLICIES: 

We have had monetary policy decisions from the four major Central Banks of Europe, Japan, US and UK in the past one week with all of them maintaining status quo on policy rates.  Earlier we also had the Canadian and Australian Central Banks maintaining unchanged policy despite recent rise in inflation.  Thus they kept door open for more action, if needed.  

EUROPE: Economic concerns have dominated while inflation has dropped substantially, which is conveyed through ECB’s message and we may well have seen the peak in their rate.   The ECB President said that impact of huge rate rises were still working through the economy. 

JAPANESE CENTRAL BANK has been sending out conflicting signals.  While loosening their stance on Yield Curve cap at 1% for 10 year JGBs, they have been seen indulging in fresh bond purchases still.  They do not think time is ripe for any policy change despite economy showing good improvement and inflation remaining high. 

Meanwhile, they continue to verbally intervene on the exchange rate.  

U.S. FEDERAL RESERVE left the policy rate unchanged when they met on Wednesday, but their statements indicate that they are focused on getting inflation back to 2% target as it hovers under 4%.  They expect to see continued impact on the economy through tightened financial conditions but are now sure how long it will impact. Market discounting shows that the policy rates will remain on hold till January (next two meetings), though FED keeps the door open for further policy action depending on the upcoming data.  

U.K. CENTRAL BANK went for a second consecutive pause in policy rate at 5.25% but published forecasts show the economy skirting close to a recession.  The central bank said it expected no growth in Britain’s economy in July-September, edging up to just

0.1% in the fourth quarter, with zero growth forecast for 2024 and an expansion of just 0.25% in 2025.  Their inflation projections show that they will maintain HIGHER FOR LONGER policy just like the FED.  

MARKETS: 

Markets have been volatile during the month, particularly in stocks and bonds.  Bond yields have actually been guiding moves in other markets, viz. stocks, currencies and commodities.  

BONDS were weaker in earlier part of the month (yields higher) as increased supply from the US Treasury was not getting enough buyers.  Initial dip in the yields came when the Middle East war started.  But as situation seemingly eased they rose again.  Subsequently, when the US Treasury announced plans to borrow less of long term treasuries they started easing again and the real fall came when the US non-farm payrolls report came weaker than expected, unemployment rate increased and the wage inflation month-on-month eased.

COUNTRY (all figs. In %)2 YEAR10 year
Currentcycle highCurrentcycle high
U.S.A.4.855.264.585.02
GERMANY3.043.392.643.02
U.K.4.675.564.334.74
JAPAN0.140.160.910.96
INDIA7.297.567.327.40

Long term yields have now fallen more than 0.5% from their cycle highs and the yield curve has steepened again (difference between 2 year and 10 year yields further increasing), a sign of future recession that analysts have been hinting at.  Bond yields in other major nations followed that of the U.S.  In Japan 10 year yields have risen close to 1% and Japanese authorities are likely to be more relaxed on its rise.

EQUITIES: Stock markets were volatile and were in a falling trend for most of the month, impacted by higher yields and the war factor.  However, they got some support initially through earnings report for Q3 coming better than forecast and the yields coming off substantially.  

MARKET01-Oct04-NovChange (Abs)Change (%)
DOW JONES33,43134,061-6301.88
S&P5004,2804,358-781.82
NASDAQ13,21613,478-2621.98
GERMAN DAX15,43915,189250-1.62
UK FTSE7,6087,417191-2.51
CHINA COMPOSITE3,1003,03070-2.26
JAPAN32,10131,949152-0.47
INDIA NSE19,07919,230-1510.79

NASDAQ and S&P500 both fell more than 10% from their recent highs and briefly entered correction territory.  But they have since bounced strongly to gain 7.5% and 6.2% respectively.  Composite index of global equities also gained 5.5% from their recent low after war getting less intense and yields falling.  

CURRENCIES: The U.S. Dollar maintained strength for most part of the month, supported by safe haven flows due to the Middle East conflict and also higher yields.  

Currency01-Oct04-NovChange (Abs)Change (%)
Dollar Index106.17105.02-1.15-1.08
EURUSD1.061.070.021.52
GBPUSD1.221.240.021.43
USDJPY149.48149.37-0.11-0.07
USDCNH7.347.29-0.05-0.74
USDINR83.2583.14-0.11-0.13

However, Dollar started to lose ground gradually mainly to the EURO and the UK Pound as war situation eased somewhat, de-escalation efforts intensified and the yields started to come off.  It was really significant that EURO maintained good demand despite the Euro Zone economy continuing to underperform the U.S. and ECB itself sounding quite dovish on the growth prospects.  

USDJPY almost hit the previous high at 151.94 (from where we had seen a big drop to below 128 last year) and has since retreated along with general Dollar weakness. We have so far seen only verbal intervention from Japanese authorities and no actual selling of Dollars has been seen.  However, the same is not ruled out should we see further weakness.  Chinese Yuan stopped falling this month and the USD held below 7.34 with investors watching to see if the economy stabilizes as some green shoots were observed.   Among commodity currencies, AUD was stronger on higher inflation number and better economic performance while Canadian Dollar underperformed as oil failed to maintain its uptrend after initial rally in the wake of the war.

OUTLOOK FOR GLOBAL MARKETS

The slowdown of the U.S. economy and the result effect of pushing down the yields is good for the risk assets and for non-Dollar currencies.  However, though U.S. Government tweaked the tenor of borrowings, they are still going to borrow much more this year from the market than last.  Their fiscal deficit more this year by 23% and reportedly over a trillion Dollar worth of bonds are maturing this year which they need to roll over at a higher rate and that will further push up the deficit.   The major headwinds for the market will be-

  1. Escalation of the war into a wider conflict and its implications for inflation. 
  2. U.S. Housing market sharp slowdown; mortgage rate highest since 2000 at 8% and affordability at multi-decade lows.  
  3. Possibilities of another shutdown of the U.S. government after November 14 and spending bills being stalled.
  4. Higher Real Yields pressure stock market sell-off.
  5. HIGHER FOR LONGER rate policy by Central Banks will slow the economies sharply resulting sell-off in risk assets and affect carry trades.
  6. Change in Japanese monetary policy also affecting carry trades.
  7. Without major structural reforms, China slows down further sharply.
  8. Widening of Germany-Italy bond spreads can lead to another debt crisis in Europe.
  9. Delinquency rates on credit card at above 2008 levels in the U.S. 

Any sharp slowdown in the global economy would be negative for risk assets and for EM currencies which depend on overseas capital.  However, we see the Dollar Index has technically seen a possible medium-term top at 107.35 and more falls are likely.  

INDIAN ECONOMY AND MARKETS

There has been mix of good and bad news for the Indian economy.  On the good side, growth has been far higher among the major economies and inflation has sharply moderated.  However, capital flows which are crucial for the country to fund its current account has been eluding in the last few months.  After an average of USD 4 bio p.m. from FIIs seen from March to August, we have seen negative flows from September onwards to a cumulative amount of nearly USD 4 bio.  The FDIs have also been far less this year from April to August compared to last year (USD 3 bio in 2023 vs. USD 18 bio in 2022).  In addition, we have been seeing consistent outflows on account of ECBs.  Due to higher interest rates abroad, corporate are not rolling over their borrowings and prefer to repay the same by borrowing in domestic market.  

All the above factors would have normally pressured the USDINR higher and more so because the Real Effective Exchange Rate of the Rupee is 5% overvalued as per RBI data.  However, the Central Bank has been intervening consistently to prevent the Rupee from falling to new lows beyond 83.29.  Due to consistent demand and RBI selling the rate has been held in a very tight range between 83 and 83.29 for the last two months.  This situation will only change if RBI gives up its intervention policy and allow rupee to find its level or if we see a gush of inflows which is not absorbed by the Rupee.

Two things to note is that even a bear trend in global Dollar Index is unlikely to see the rupee strengthen immediately due to its overvaluation on REER basis and the flows which are likely to slow down due to elections to the State and later to the Lok Sabha.  The expected flows due to the inclusion of Indian Bonds in the JP Morgan’s EM Bond Index will only happen in the next financial year.  Also due to the valuation concerns, FII flows to Indian equities will take some time to resume.  

We feel that if the domestic inflation falls further, we may see the RBI letting the Rupee to fall.  

Our expectation for the Rupee for the next month is to move between 82.80 and

83.80.  

COMMODITY Outlook

GOLD: COMEX: XAUUSD: CMP: USD 1985

Gold observed a brilliant rally last month after escalation of the Geo-political tensions. The yellow metal found support in the 1800s zone to rally back above USD 2000 levels during the month. 

Although the metal moved with momentum in the previous month it is yet to break above the triple top it formed around USD 2070 levels which currently acts as a formidable resistance. Break of this resistance would bring in a new rally for the metal leading to USD 2300/2400 for Gold. Immediate resistance is at USD 2015 levels. 

Small mean reversion move can be expected for the pair towards support zone before beginning of any new trending move. Supports around USD 1960 and USD 1935 can hold short term dips while much stronger supports are held at USD 1860.

GOLD: MCX Gold: CMP: INR 60880

MCX Gold wasn’t alienated in the Gold rally previous month and it moved along with COMEX gold towards it multiple tops formed around INR 61,850. Break above this should kick start another trending move on the upside but needs correction in the shorter time frame before it begins it march higher. Immediate short-term resistance can be observed at INR 61,400. Supports expected to hold this mean reversion action for MCX Gold can be around INR 59,400 and more significant supports lie at INR 57,800. Sideways action for the metal in the range for this month can be expected unless further escalation in Geo-politics is observed.

TAKEAWAYS FROM JACKSONHOLD SYMPOZIUM

Powell really had his Volcker moment last year at Jacksonhole, but it was quite a damp affair this year.  Powell’s words lacked the drama associated with previous speeches.  

In remarks delivered at the central bank conference in Jackson Hole, Wyoming, Powell said inflation was still too high even with recent favourable readings, and that the U.S. central bank has substantial ground to cover to regain price stability.  So they are clearly keeping door open for more rate hikes.

But at the same time, Powell noted that economic uncertainty called for “agile” monetary policy making, and that the Fed will proceed “carefully” when deciding its next policy move.

There was little bit for every one be it bull or a bear as Powell gave quite a blaanced remark.  

But other FED members had differing views on  the course the CB should take, but again depending on upcoming inflation reports.  

ECB

ECB policymakers are increasingly concerned about deteriorating growth prospects and momentum for a pause in its rate hikes is building,  But Lagarde did not deviate from her known cautious remarks and there was no hint of dovishness, hence EURO yields and the EURUSD recovered their losses.  

BANK OF JAPAN

But message from BOJ Governor Ueda was decidedly dovish as he said Underlying inflation in Japan remains “a bit below” the Bank of Japan’s 2 per cent target, and as a result the bank will maintain the current approach to monetary policy.  He even expected inflation to decline from the current levels.  

BANK OF ENGLAND

Interest rates in Britain might have to stay high “for some time yet,” Bank of England Deputy Governor Ben Broadbent said on Saturday, as the central bank seeks to curb the highest inflation rate among the world’s big rich economies.  Broadbent said in a speech that the knock-on effects of the surge in prices – such as pressure on employers to push up wages, which has led to record growth in pay – were unlikely to fade away as rapidly as they emerged.

As can be seen most Central Bankers were non-committal about policy move going forward and decidedly data-dependent.  

CURRENCY IMPLICATION – no clear influence for the Dollar from the above statements.  If anything, one could say Japanese Yen would weaken more, which did happen as it touched a147.45 yesterday from 145.75 seen on Friday.  

It looks like even the market wants to see more data to confirm US economy’s relative resilience and how the yields react.  Looking at some of the forward looking indicators like M2 declining, consumer confidence dropping, job openings falling and increasing credit card access by consumers, one could say that slowdown in the largest economy may just be starting.    If it does, it boils down to whether it is a severe slowdown or still holds better than others. 

Eventually, Bond market will give us the direction for the Dollar which looks slightly on the bullish side (yields to drop). 

BUDGET 2023 PROPOSALS AND IMPLICATIONS

UNION BUDGET 22-23

Unlike what is usually associated in the Indian Budget, the one announced this year contained nothing dramatic or path breaking and had little that concerned the common man directly.  But at the same time, it was growth and investment oriented with a reformist approach.  It did disappoint many vis-à-vis their expectations, but best thing was that the Government avoided including any populist measures, notwithstanding that we have many State elections coming up.  

FISCAL MATH – The deficit for FY 22 is exceeded by 0.1% and pegged at 6.9% of GDP vs. estimate of 6.8%, despite robust revenue collections.  This overshoot is due to higher expenditure.   But this may still come down due to increased tax collections.  But estimate for FY 23 is kept at 6.4% of GDP which looks achievable due to higher tax collections that will accrue due to higher nominal GDP which is projected at 11%.  This is despite higher budget allocation at the Central level by additional 3.5 trillion.    But importantly, budget also allows States to run a deficit of 4% vs. 3% mandated by the Finance Commission, besides allocating 1 lakh crores as 50 year interest free loan over and above the normal borrowings.  Allowing State to spend more is very positive as they contribute two-thirds of the capex.  The budgeted deficit may be easily met as the revenue estimates look quite conservative considering the projected growth.  

HIGHER GOVERNMENT BORROWINGS – The borrowing numbers at Rs. 14.95 lakh crores are higher than even the highest estimate among market participants. It’s not been offset with any announcement regarding overseas trading of Indian bonds or bond index inclusion.  69% of the fiscal deficit is expected to be funded with market borrowing, which is higher than recent years.  Reliance on small savings borrowing is pegged at Rs. 4.25 lakh crores vs. Rs. 5.91 lakh crores in FY 22.  The borrowing program will be very challenging for market in a year when RBI is expected to raise rates and curtail excess liquidity.  It is not, therefore, surprising that the bond markets sold off with yield on 10 year rising more than 20 basis points from the low of the day.  

Part of the borrowing is envisaged through issuance of Green Bonds as borrowing for green infrastructure.  It is not clear how these Bonds will be made more attractive to invest in.  

GDP AND REVENUE PROJECTIONS: Nominal GDP for FY 23 has been projected at 11.1%.  Economic survey had indicated growth of 8.00 to 8.5%. Assuming inflation at even 4-5%, the nominal GDP growth should have been above 12%.    Accordingly, even the revenue projections have a touch of conservatism.   Thus, we feel the deficit target of 6.4% for FY23 will be easily met, unless we have a big overshoot in expenditure.  

HIGHER CAPEX – Budget’s clear emphasis on expanding capital expenditure is a welcome directional change particularly since a larger portion of 45.2% of fiscal deficit is being devoted to capital expenditure (Rs. 7.5 lakh crores), with higher allocations for roads and railways, but lower for financial services.  At a two decade high it spells a welcome structural change in government expenditure in favour of capital expenditures.  Further, the central government’s efforts to nudge states through incentives has aided in contributing to the recovery in capex spending by states.  This is clearly pro-growth and pro employment.  The approach seems to be to support and incentivise supply-side capacity creation for sustainable growth over a longer period of time.  

Revenue expenditure has been contained with lower subsidies for fertiliser and food as well as for the MGNREGA scheme. 

DISINVESTMENT: Disinvestment targets have been revised down (perhaps getting more realistic).  Budget estimates Rs. 780 billion for FY 22 against earlier estimate of 1.75 trillion, while for the next year it is estimated at 650 billion rupees.   Though the Finance Minister stated that the LIC IPO will happen soon, one can conclude that the size of the proceeds from the same is going to be much less, though the valuation of LIC is yet to reach the final conclusion.  It leads us to think that this IPO will be split between two fiscal years.  Smaller IPO this FY means that related FX flows will be lower which will be easily absorbed by RBI without any major appreciation pressure.  

OTHER MEASURES TO BOOST GROWTH AND INVESTMENTS: Concessional tax rate of 15% for domestic manufacturing companies commencing manufacturing or production by 31 March 2023 extended to 31 March 2024.  Profit-linked tax exemption for eligible start-ups extended by another year.  Start-ups incorporated up to 31 March 2023 will now be eligible.   Several changes to duty rates aligned to “Make-in-India” and “Atmanirbhar Bharat” policy have been made.  Proposal to phase out concessional rates in capital goods and project imports gradually; moderate tariff of 7.5% made applicable

Focus on promoting digital economy & fintech, technology enabled development, energy transition, and climate action.  SEZ Act to be replaced by new legislation to enable states to become partners in ‘Development of Enterprise and Service Hubs’.

TAXES: There have only been minor changes in the taxes, like capping surcharge on LTCG at 15%, tax relief for differently enabled persons, establishment of faceless customs, removal of some of the age-old duties and exemptions, simplification of custom rate and tariff structure particularly for sectors like textiles, chemicals and metals.  Further, more rationalizations have been introduced to encourage domestic production. For the gems and jewelry sector which has contributed to a big surge in exports,   customs duty has been cut on cut and polished diamond and gemstones, besides implementing a simplified regulatory framework to facility export of jewellery through e-commerce.    

Income from virtual digital assets (including crypto currencies) will be taxed at 30% with only cost of acquisition being allowed a deduction. Gifts of virtual digital assets will be a benefit taxable in the hands of the recipient.  TDS at 1% introduced for virtual digital assets transactions.  

IMPLICATIONS FOR MARKETS: Higher borrowings and uncertainty about timing of including India bonds in the Global Bond Index are negative for the money market and yields will see upward pressure.  However, as foreigners’ holding of Indian Bonds is far less now, we may not see a big forex outflow due to the same.  On the other hand, further higher yields above 7% will bring in flows from them once RBI normalizes the policy.  

India’s monetary policy is likely to tighten in the coming months as RBI responds to sustained higher inflation and global tightening trend.  However, in its place the higher fiscal from the Government is expected to support the economy.

 Budget has assumed crude oil prices at 70-75 per barrel, which looks very optimistic.  As per current trends, oil is likely to be pegged at much higher level and that has negative implications for the trade and Current Account with attendant pressure on Rupee.  

Emphasis on growth in the budget will boost the corporate sector and possibly re-rate the earnings growth.  This is likely to bring back the FII investments in selected sectors.  Besides, long term growth prospects being cemented, will continue to attract direct investment in Indian corporate.   Disinvestment targets have been moderated, but there is likelihood of an outperformance.  However, globally tightening financial conditions will adversely affect the carry flows.  Thus USDINR is likely to move in range between 73.50 and 76.50 with Central Bank’s presence at extremes preventing undue volatility. 

ZAR REPORT – JANUARY 2023

The South African Rand kept up to its reputation as a high beta currency in the last quarter of 2022, with USDZAR moving almost 10% from high to low, while the comparable index of EM currencies moved only 6%.  This was the quarter when Dollar went through a sizeable correction to its 16 month rally, the trigger coming from the steady moderation in US inflation and the rate hike prospects being sized down by the market, though FED officials remained hawkish.  Investors took profit on their Dollar long positions and bought back bonds which had fallen substantially.  Even Global stock Index recovered as much as 18% despite recession fears in the background and here too the South African benchmark index outdid by rising by more than 23% from the lows.  

MACRO DEVELOPMENTS

TRADE SURPLUS of South Africa is estimated to fall far short of the robust one posted in 2021. Trade surplus for the 11 months to the end of November was R187.8-billion, less than half of the R402-billion recorded over the same period in 2021.   But the sizeable fall in oil price is already helping to arrest this trend.  In fact, Current Account Deficit as a percentage of GDP has slightly improved from -1.3% to -0.3% as a direct result of trade balance improving in November.   The balance of payment was affected by more capital flowing out than what came in.  

COMMODITY INFLUENCE: The oil price is losing its lustre in the face of a slowing global economy, and that may contain the price of major South African commodities such as platinum group metals and iron ore.  On the other hand, Gold may benefit from the fog of global economic uncertainty or emerging geopolitical flashpoints, but its importance to the South African economy and its export profile is a fraction of what it once was.  Should the global economy enter a deep recession in 2023 as expected by many analysts, the external performance and thus the Rand will be negatively affected.  

Non-economic factors have also worked to affect South Africa’s performance on the external front. 

LOGISTICS ISSUES: Transnet which is a fully owned South African Government organization operating as a corporate entity aimed at both supporting and contributing to the country’s freight logistics network continued to pose problems in achieving export performance with several strikes, inefficiency and corruption.  It is estimated that there was an export loss of SAR 50 billion on an annualised basis last year for iron ore, coal, chrome, ferrochrome and manganese exporters, as measured by delivered tonnages against contracted rail tonnages. This compares to a loss of R35 billion in 2021 based on the same metric. Attempts to reform the system have failed repeatedly.

POLITICAL BOTLENECKS: The current President Mr. Cyril Ramaphosa, who had succeeded Mr. Zuma who was forced to resign amid numerous charges of corruption, however faced his own scandal.  An independent report commissioned by the speaker of parliament said Mr Ramaphosa may have broken the law but he has denied any wrongdoing.  After facing impeachment proceedings, he managed to survive a vote in Parliament.  However, there are divisions within the party and his political future and hence the stability of politics in the country is under question.  Preoccupations with political survival have affected economic performance.  

DOMESTIC MACROS

On most parameters they performed better.  GDP for Q3 2023 improved to 1.6% from -0.7% and bettered expectations also.  Consumer Confidence rose from -20 to -8.  As already mentioned earlier CPI inflation also came down.  Manufacturing PMI rose to 50.6 from 49.5.  

INFLATION AND RATES: In line with the global trend, recent inflation in South Africa also declined slightly and the Central Bank is likely to keep the monetary policy unchanged for now.  From November 2021 to November 2022, they had raised its key repo rate by 350 basis points, bringing the prime lending rate to 10.5%.  However, major global Central Banks are still on rate hike path as their inflation rate remains far higher than the target, hence the funds flow might get affected.  

RECENT RAND MOVES AND OUTLOOK

Temporary resolution of political crisis, relative better performance on trade led by lower oil prices and also the fall in broader Dollar Index have helped Rand to perform better in the last two months.  However, the structural problems haunting the economy remain and will keep it from gaining much.  In fact, the latest fall in the Dollar Index has not seen Rand extend its gain much beyond 17.00 and has in fact weakened last week even as many EM currencies performed better.  

Prospects of recession in major countries are likely to affect its exports and will keep the currency subdued.  

TECHNICALLY, we continue to believe that the range of 16.50 to 18.00 will hold Rand moves at least in the first half of this year.  Only a further large slippage in the broader Dollar can see more gains for the South African currency, but even then we do not expect 15.50 to break without a vast fundamental shift in its external performance.  

SUPPORT LEVELS 16.60 AND 16.20

RESISTANCE LEVELS 17.30 AND 17.75