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Investors Cautious Ahead Of US Federal Reserve Policy Meeting

Monday, July 29, 2013
By Pramit Brahmbhatt

Pramit Brahmbhatt is CEO of Alpari FinancialServices (India)

The rupee traded strong last week as the RBI again took some steps to make the currency scarce and squeeze the liquidity to support the rupee. Last week on Wednesday, Indian Rupee posted its biggest single-day gain in nearly a month. On a weekly basis it has traded strong for the third consecutive week.
During this month until now, the rupee has already appreciated by more than 2.50%. Local equity markets reacted negatively on the actions taken by the RBI and continued to trade weak for the second consecutive week and lost more than 2% last week which capped the rupee gain. The trading range for the Spot USD/INR pair is expected to be within 58.70 to 59.40.

It is recommended to be cautious and Buy USD/INR Futures on dips with the appropriate stop loss as the rupee at this stage is expected to depreciate against dollar. Pivot Point for the Pair is at 59.20.

Last Tuesday, the RBI lowered the overall limit for borrowing under the daily liquidity adjustment facility (LAF) for each bank to 0.5% of deposits from 1%. The RBI has also asked banks to maintain 99% of their daily cash reserve ratio requirements with the RBI compared to 70% earlier. The RBI also announced the sale of 60 billion Indian rupees of short end cash management bills to pull out more cash from the banking system. Taking cues from this the Indian Rupee traded below 59.00 levels and over all during the last week it appreciated by more than 1.25%.

Last week the Federal Reserve Chairman Ben Bernanke stated that the U.S. Central bank is likely to keep monetary easing policies in place, though it may slow the pace of its bond-purchase program later this year if the economy continues to improve. Currently the U.S. Central bank is buying $85 billion a month in government backed bonds. The monetary stimulus has been seen as putting pressure on the dollar’s value, and the latest suggestion by Bernanke that it may last longer than anticipated has hurt the dollar in recent sessions. Now investors are trading cautiously as they are waiting for Federal Reserve policy meet this week.

The dollar index which measures the greenback against a basket of six other currencies continued to trade weak for the third consecutive week against other major currencies. This month the Dollar Index has weakened by almost 3.50% until now. The weak Dollar has helped Gold to appreciate and this week it has traded over one month high. Weaker dollar tends to boost dollar-denominated commodities such as oil and gold as it makes them less expensive to holders of other currencies. Gold has strengthened by over 10% this month.

Last week on Wednesday, data showed better-than-expected figures on July U.S. manufacturing activity and June new U.S. home sales. Separate data on Thursday also showed that initial jobless claims moved up by 7,000 to a seasonally adjusted 343,000 for the week ended July 20. An improvement in the economy will increase the expectations from the Fed to reduce the flow of monetary stimulus to the economy.

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