DAILY MARKET COMMENTARY: Friday - February 1, 2013

The Indian rupee opened at 53.22 levels after closing at 53.21 levels yesterday. It is expected to trade in the range of 53.10-53.50 levels.

Rupee appreciated for the third straight session and was trading above its three month high against the US dollar.  The Indian government is continuously taking steps to support the rupee. It has raised the import duty on gold; it raised FII investment limit in government securities and corporate bonds by $5 billion each and it also allowed exporters to make use of the forex market before utilizing their foreign currency accounts.

However the impact of these measures is unlikely to take place immediately. As mentioned by the RBI governor, the country cannot totally depend on the flows as they are volatile. In this regards, we noted that there were flows worth $14 billion in September-December period but this fell significantly short of the $76.5 billion trade deficit over the same period.

After the series of reforms, the finance minister has now turned to defense and road projects in a final attempt to hit a tough fiscal deficit target by March. The cuts will reduce spending by about 1.1 trillion rupees in the current financial year, some 8 percent of budgeted outlay.

In the meanwhile, India’s fiscal deficit data was released yesterday for the period of April-December, 2012, which stood at $76.22 billion or 78.8 per cent of the budgeted full fiscal year 2012/13 target. In March 2012, the government had budgeted a fiscal deficit of Rs 5.14 trillion or 5.1 per cent of the GDP, for the current fiscal year that ends in March.

It will be interesting to see how the Finance Minister manages to stick to his fiscal deficit target of 5.3 percent in the current fiscal and further cut it lower to 4.8 percent in the next fiscal as he has promised.

Although, the government is taking every possible step to support the rupee and revive the economic growth, the sustainability of these measures will be a big challenge for it.

The US 10 year treasury yields are trading at 1.98 levels. The Indian bond yields closed 2 bps higher at 7.91 levels.

Outlook: Exporters wait for initiating covers until it breaks the 53.00 levels on a weekly closing basis. Importers should cover on dips as and when comfortable and keep stop a loss of 53.80 levels. There is a very strong support close to 53.20 levels which will be difficult to break. OVERALL: USD/INR pair still maintains bullish.

USD/JPY:  The Yen is trading at 91.77 levels. The yen fell to its lowest level in 2 1/2 years against the US dollar. The fall was on account of increase in the jobless rate and a decline in household spending. This will add burden on a further monetary easing to boost growth thereby giving room for further depreciation in the yen against the US dollar. Data on unemployment rate climbed to 4.2% in December from 4.1% in the previous month whereas the household spending fell to 0.7% from the previous 0.2%. The near term support is seen at 88.00 and resistance is at 92.80.

EUR/USD:  The Euro is trading on stronger note at 1.3606 levels against the US dollar. It has been observed that the Euro is completely ignoring the fall in German retail sales and focused exclusively on the decline in the unemployment rate. Unemployment declined unexpectedly to -16K versus expectations of a rise of 10K this overshadowed the German Retail Sales data plunging to -1.7% versus forecasts of -0.1%. The near term support is at 1.3308 and resistance is at 1.3680.

GBP/USD: The British Pound recovered strongly against the US Dollar and Euro. The British Pound is trading higher at 1.5864 levels. The recovery in the British Pound was mainly due to better than expected economic data. The consumer confidence in the UK improved significantly in the month of January as per GFK. The 3 point increase in the index can be attributed to better outlook on an economic front and a relief to retailers also. On the other hand the housing prices also increased by 0.5% which supported the Pound. The pair is expected to find a support near 1.5672 levels and the resistance is near 1.5943 levels.

AUD/USD: Australian dollar is trading weaker at 1.0403 levels against the US Dollar. With negative data released today morning didn’t support Australian Dollar to hold the levels of 1.0450. Firstly, the AIG Manufacturing Index decline to 5 month low at 40.2 versus the 44.3 which is a sign of worry. Secondly, a drop of 0.1% in producers price index which came at 0.2% versus the expectation of 0.3%. Adding to the decline, the China Manufacturing unexpectedly fell last month as export orders contracted and production slowed down, signalling a recovery in the world’s second biggest economy has yet not gain momentum. The near term support is seen at 1.0388 levels while immediate resistance is at 1.0485 levels.

(Source: Corporate Communications, India Forex Advisors Pvt Ltd)