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Mixed Trends On The Rupee

Monday, October 15, 2012

Pramit Brahmbhatt is CEO of Alpari FinancialServices (India)

The Rupee (INR) carried weakness from the last week’s weekend moves and continued to remain weak till the mid week. The pair then strengthened sharply on the last but one day of the week only to continue its weakening spree on the last day.

The retreat in equity markets due to surfacing of the controversies in DLF land deals involving influential persons of congress high command weighed on INR. The disappointment from the EU finance ministers meet after they failed to provide the ECB the power to control the Non Euro member’s banks pushed the Euro lower.

The global risk aversion phase engulfed the global markets after a sharp rise in Spain’s bond yields forcing the debt ridden nation to seek financial bailout. The S&P downgrade of Spain debt ratings to – BBB just above the junk ratings has forced the Spain’s Eco Minister to float four billion Euro bonds to manage its finances.

The S&P downgrade warning to India on a possible downgrade over a period of twenty four months citing slowdown in reforms, unbalanced fiscal and current a/c’s and rising subsidy bill. The widening of the trade deficit to a whopping $18.1bn also added to the weakness. The surprise rise in Industrial production to 2.7% against the expectations of 1.1% with a downward revision of prior numbers to -0.2 though improved the sentiments but wasn’t successful in holding the gains.

The saga of rising capital flows continued to gain momentum once the global risk phase resurfaced and also on the policy decisions on Urea subsidy and sugar decontrol proposals were accepted by the government. The Indian equity markets made some decent recoveries from their lows after a healthy correction from their lows making strong ground for further rises.

Inflation numbers in the coming week will guide the RBI in its month-end policy meet which is expected to harden on rising energy prices. The bankers met the RBI and proposed for a CRR cut to boost growth in economy. The political scenario got worse on fresh allegations of corruption charges against the Law minister and senior members of the congress high command.

The global market pendulum continued witness sharp swings on mixed sentiments and rising speculations of a formal request for financial bailout to ECB. All eyes and focus is now on to the PBoC as a weaker than expected economic numbers from China shall pressure the PBoC to take aggressive stimulus measures to stem growth in the Asia’s largest economy. The better than expected Chinese trade balance numbers has dented the hopes of easing from China but the Inflation and PMI numbers in the coming week shall guide the PBoC easing decisions.

The US weekly unemployment numbers dropped to their four and half year lows signalling strong recovery in US job market but the upcoming retail sales signifying spending and housing numbers shall set the limit for the Fed’s open ended MBS program. The Spain’s bond auction and the timing of the decision to seek a financial bailout shall be the trigger events and also a game changer for Euro zone Debt problems.

The dollar index rose above the 80.00 levels but was pushed lower again below the same raising the possibilities of downward price action on a move below 79.20 levels. The Euro and GBP made some sharp declines in the last week but regained some of their lost grounds towards the week end. The Euro edged near to 1.3000 levels while the GBP climbed above the 1.6000 levels.

The sharp rise in capital inflows is expected to continue in the coming week too on back of the reforms agenda of the government but some consolidation can be witnessed after sharp gains in pair.

The grim global economic outlook shall pressure the INR lower while fuelling the dollar index higher but strong capital flows and policy reforms shall induce strengths in INR.

For the week importers can create a long hedge around the Rs 52.30 – Rs 52.50 levels for their payments and exporters can use the weakness towards Rs 53.60 – Rs 53.80 levels to initiate short hedge with a stop loss above Rs 54.30 levels as to cover their receipts. The crucial levels for INR appreciation are Rs 52.00 levels and for depreciation the Rs 53.30 levels can be closely watched as rise above Rs 53.30 levels shall weaken the pair till Rs 53.60 levels.

Crude oil prices maintained bullish stance on fresh supply threats from Middle East. The prices eased on a weak demand forecast from IEA towards the weekend. The sharp rise in dollar index capped gains while declines were supported by tensions between Turkey and Syria. The $ 95 - $ 85 levels continue to prevail for the week. In the absence of escalations of fresh supply threats the prices shall take their downward momentum.

Derivative Strategy: Deep out of money options strategy can be used for optimal gains. When the futures CMP is around Rs 53.70 levels – Buy Rs 52.75 or Rs 52.50 Put options and when the futures price trades around Rs 52.50 – Rs 52.25 levels – Buy Rs 53.50 – Rs 53.25 Call options.

Technical Take on USDINR
The pair stalled the five week losing streak but was restricted by the falling trend line resistance. A decisive move above the same shall extend gains towards the moving averages. The narrowing sideways channel is expected to arrest the price moves in near term. The Rs 53.60 and Rs 54.00 levels constitute to be the resistance levels while support is placed at Rs 52.50 and Rs 52.20 levels. We recommend selling on rise towards Rs 53.70 levels with a stop loss above Rs 54.40 Targeting Rs 52.50 - Rs 52.20 levels.

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