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Crude, GDP May Curb Rising Rupee

Monday, August 27, 2012
Pramit Brahmbhatt

The Indian rupee (INR) started the week on a flat note but continued to strengthen till the last but one day where it pared some of the gains and ended at an equal difference between low and high while keeping on gains.

Like in the previous week the CPI numbers too beat industry expectations and were much in line with the WPI numbers with a reading in single digit. The CPI came in at 9.87% against the double digit expectations providing the policy makers a sigh of relief and also allowing them to consider the easing of interest rates.

The monsoon also provided some relief to Central and Southern India and narrowed the deficit numbers in the western and northern parts of the country. The global risk on mode continued the rising inflow of foreign capital which kept the Indian equity markets on an upbeat contributing towards gains in INR. The Indian equity markets continued to scale over five month high supported by FII capital.

This week marks the Q1 GDP numbers which is expected to dip to 5.1% levels. In our opinion the larger is the downside in GDP the more aggressive shall be the policy measures from government which is already under fire from all pockets of the society.

The CAG tabling the reports of scams in parliament has brought the monsoon session of parliament to a stand still for the fourth consecutive day. The government has showed some aggressive action in policy reforms process which has been supportive for INR but the sharp rise in Brent Crude prices shall lead to further blackening of the economic situation.

The global markets which were already trading on a risk on mode got the boost from FOMC minutes which showed that larger number of members has supported for easing to support the economy. The cable currencies made a sharp run up registering over seven week high as the markets advanced sharply up on hopes of liquidity. All eyes now would be on Jackson Hole where Mr. Bernanke will take on the fate of QE. We are of a view that with slow and steady growth in US and the equity markets already nearing their highs of 2008 the chances of additional easing from the Fed are less.

But with worsening of economic numbers from China, Germany, EU, Japan and UK the doors of QE are still let wide open.

The EU remained quiet and supportive with the softening of bond yields from the peripheral countries and the comments from the German chancellor to support ECB in safeguarding the interest of the single currency. The EU met this weekend but nothing concrete came out of the same triggering some retreat in the cable currencies.

The dollar index too rebounded from its lows and shall extend the rebound as long as the 81.00 levels are respected, below which the downside shall be extended towards the 80.50-80.10 levels.

The INR in the coming week is expected to maintain its strengthening pace but rising crude oil prices and weak GDP forecasts shall cap such strengths. The Q4 GDP numbers came in at 5.3% and reading below the same shall be countered with active policy reforms. The Jackson Hole shall clear the QE clouds and a disappointment will squeeze out the gains in global markets.

For the week importers can wait for the INR to appreciate around Rs 54.50 - Rs 55.00 levels for partial hedging for their payments which we expect to be achieved on a move below Rs 55.20 levels. A complete long hedge can be created around Rs 54.00 levels for medium term payments. Exporters can use the weakness towards Rs 55.80 levels to initiate a short hedge with a stop loss above Rs 56.20 levels as to cover their receipts.

The crucial levels for INR appreciation are Rs 55.10 - Rs 54.90 levels as a move below the same shall extend gains and for depreciation the Rs 56.20 levels can be closely watched as rise above Rs 56.20 levels shall weaken the pair till Rs 56.50 – Rs 57.00 levels.

Crude oil prices edged higher on positive global markets and weak dollar index. A larger than expected draw from the weekly oil inventories has also been supporting gains. The supply side threats continue to remain intact while the liquidity in global markets continues to drive the prices higher. The contractions in Chinese, EU and Japanese trade balance numbers are a weak sign which shall cap gains. The $100 level still continues to act as resistance and we expect the $93 - $99 range in next week.

Gold prices sky rocketed above the resistance levels once the FOMC minutes were out. The pack scaled up for new highs once they made their way above the 1630 levels. A weak dollar and positive correlation with global markets has been supportive for the prices. The uptrend can continue as long as the liquidity hopes are kept alive. We feel that there shall be nothing to expect at the Jackson Hole which shall cap the gains in near future. A rise above 1680 levels shall target the 1700 levels making the price vulnerable for sharp corrections.

Technical Take on USDINR
The INR though moved below the trend line support of the symmetrical triangle but moved back inside towards the close. The trading of the pair within the moving averages is a weak sign and the downward price action shall continue to remain alive as long as the pair respects the trend line resistance above. A close above the same shall be positive for pair and can target the Rs 56.10 – Rs 56.50 levels. For the week the pair shall range between the Rs 56.00 – Rs 55.00 levels and rise towards Rs 55.80 can be used as selling opportunity with a stop loss above Rs 56.20 targeting Rs 55.20 – Rs 54.90 levels.

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