Daily Market Commentary: Thursday, August 23, 2012

Domestic and International Highlights:

 

The Indian Rupee opened at 55.22 levels after closing yesterday at 55.48 levels. The market operations were hit after about one million bank employees began a two-day strike. The rupee is expected to be in a narrow range of 55.10-55.50 levels as the strike continues for the second day.

 

The Asian currencies are trading stronger on speculation that the central bank of China may ease monetary policy to support the economy. The Asian shares rose as the Federal Reserve's minutes raised the prospect for more stimulus, while the uncertainty continues over progress in Europe's debt crisis.

 

The Fed policy makers said that they will step up record stimulus if needed to spur growth and unless incoming data point to "substantial and sustainable" strengthening in the recovery.

 

The positive economic reports from US in recent days should reduce the expectations, but hopes remain for the Fed to take further stimulus at its September meeting. Chairman Ben S. Bernanke will be speaking on Aug. 31 which will be followed by Fed officials meet on Sept. 12-13.

 

The easing idea seems little difficult as US is witnessing worst drought in 56 years due to poor rains which has resulted in higher prices of food grains. The increased quantitative easing could fuel inflationary pressure as it impact the commodity prices further.

 

The uncertainty is still persisting over the effectiveness of Greek Prime Minister's attempts to convince other European officials that his country should be given more time to meet targets for deficit cuts. The Euro group Chief Jean-Claude Juncker warned the country was staring at its "last chance" to avoid bankruptcy. The final decision to grant more time to Greece would depend on the findings of the troika. The French and German leaders meet today to discuss on the matter.

 

The US 10 year treasury yield is trading lower at 1.70%. The Indian 10-year benchmark bond yield eased marginally on Wednesday. The benchmark 10-year bond yield fell 3 bps to 8.22% from its previous close. The bond prices could see some support amid continued signs of easing liquidity, with repo borrowings from the central bank falling below 400 rupees for the second session in a row on Wednesday.

 

Outlook: The Indian Rupee is in a range of 55 - 56 levels. Exporters still maintain covers near 56 levels and importers near 55.20-55.40 levels. The pair still stays USD/INR bullish target 56.00. Chart patterns show a major breakout is expected soon in USD/INR.

 

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