It was an action packed week for the rupee, which surprised many market players with a slide of almost ten paisa in a matter of three days.
The beginning of the week was deceptive with rupee opening relatively calm on Monday at 48.3350/3450 assisted by dollar inflows of the previous week. There was some demand seen by a state run company but the supplies were enough to keep the Rupee firm. Sentiment in the stock markets was good with Infosys, declaring a Q2net profit, which was up 12%. Forex reserves rose to a record $63.259 bln on Oct 4th and was seen growing at the rate of $1 bln dollars a month, which makes it more than sufficient to meet immediate contingencies. Cash markets were closed Monday since it was a holiday in the US. Premium on forward dollars on the eve of the Dusshera holiday ended slightly lower from open at 3.83%.
After the holiday, rupee opened steady on Wednesday at 48.32/33 but came under sharp pressure in the late trading hours. Reportedly, a large size private sector corporate bought heavily to make some loan repayments and the market players got caught short. INR closed at 48.395/48.405. However premiums eased after a large state-owned bank sold forward dollars. Call too ended sharply down as supplies surge after RBI rejected Rs 67.3 billion worth of bids at repo. Overnight call ended 5.00-5.25% vs 5.70-5.80%. The J.P Morgan report on Monday indicated that the REER edged up to 99.1 just a percent off the neutral mark of 100. The strength in the Dollar continued, which was aided by a smart four-day rally in stocks with the Dow crossing over the 8000 mark.
On Thursday, Rupee was on a roller coaster ride, opening at 48.40/41 and moving to 48.35/ 36 midday before weakening to 48.39/40 levels by the end of the day. There was paying interest on behalf of RBI, which was again manifest towards the close of trading hours. Benchmark six-month premia was 3.76% at close as aganist the previous close of 3.75%.
Media reports that India’s fiscal deficit was to pierce 6.5% of GDP and RBI Governor Bimal Jalan’s statement that banks should protect themselves against excessive bond market exposure, cast a shadow of doubt on the interest rate cut expected in the credit policy to be announced on Oct 29. Clearly the forward premia has fairly discounted a bank rate cut or atleast a repo rate cut of 25 bps and if that were not to happen, there are chances premia would be up, after two weeks. Brent crude though is steady around $28.50 which leaves the petro related fears currently, absent from the market.
On the last day of the week, rupee was seen cautiously trading around 48.40 levels after opening at 48.3975. For the third straight day, foreign banks were seen busy buying for their corporate customers. Though, some state banks sold at higher levels, demand was too heavy to let the Rupee retrace. Premiums moved in a narrow range , tracking a weak spot rupee and lower government bond yields. The call money rates ended higher on the back of strong demand from several primary dealers and a few private sector and co-operative banks. Supplies were affected in late trade as the RBI accepted all the bids it received at its repo auction today. The overnight call ended at 5.60-5.70%, up from 5.55-5.65% Thursday
US Dollar (USD):
Dollar had a good rally this week chiefly on the back of powerful stock market gains.
US business inventories declined by 0.1% in August versus a 0.4% rise in July, posting the first drop in three months. Economists had been anticipating an increase of 0.1%. Industrial production fell by 0.1% in September versus a 0.3% decline in August. Capacity utilization rate dipped to 75.9% versus 76% the prior month. The Philadelphia Fed survey index plunged to -13.1 in October versus 2.3 in September. US housing market showed signs of re-igniting following a cooling off this summer, as new housing starts surged by 13.3% in September to a 16-year high. This jump follows a revised 1.5% drop in August, which had marked the third consecutive monthly decline and raised concerns that the housing market was headed for a slowdown. Weekly jobless claims relapsed above the key 400,000 mark, rising by 22,000 claims to 411,000. CPI was up 0.2% in the September. Core CPI increased by 0.1%. US August trade deficit soared to a new record high of 38.46 bln above consensus forecasts of $35.5 billion.
Dow Jones closed the week at 8322 up 472 points from previous week’s close. Nasdaq ended the week at 1287 up 77 points as compared to previous week’s close.
Euro (EUR) – (O-0.9870 H- 0.9893 L- 0.9698 C- 0.9717):
Euro got hammered this week due to comments triggered by German fiscal deficit.
Germany acknowledged it was set to breach the rules of the European Union's stability and growth pact, the strict fiscal code it devised in the 1990s to give credibility to the new single currency. Hans Eichel, German Finance minister mentioned that Berlin would be unable this year to keep its budget deficit below 3 per cent of gross domestic product, the ceiling set under the pact. This frank admission was followed by comments from Head of the EU commission -- Romano Prodi, who called the EU's Growth and Stability Pact "stupid”, referring to the rigidity of the pact, which requires nations to cap their budget deficits at 3% of GDP. Meanwhile, ECB President Wim Duisenberg told G7 finance officials he would cut rates if needed.
German think tank ZEW's expectations indicator plunged below consensus forecasts to 23.4 in October, showing further deterioration from a reading of 39.5 last month. Eurozone final CPI numbers were unchanged in September at 0.3% m/m and 2.1% y/y. Eurozone August Industrial Production rose 0.6% m/m (exp 0.5%, prev rev to -0.8% from -0.9%).
UK Pound (GBP) – (O- 1.5619 H- 1.5625 L- 1.5438 C- 1.5454):
Pound held to 1.55 support till the last trading day wherein it yielded to Dollar`s pressure.
UK September unemployment rate was steady at 3.1% (exp 3.1%, prev 3.1%). Underlying inflation rate rose more than expected in the year to September. The retail price index excluding mortgage interest payments (RPIX) - the government's preferred measure of inflation - rose 2.1 per cent in the twelve months to September. Speaking to business leaders in Manchester, BoE Governor Eddie George hinted that interest rates may be cut further to combat the impact of falling share prices.
Japan Yen (JPY) – (O- 123.91 H- 125.56 L- 123.82 C- 125.48):
Dollar kept up the pressure on yen throughout the week even as Nikkei gained and closed above 9000 mark for the week.
Japan August Capacity Utilization was up 2.1% m/m. August Industrial Output was revised up 1.4% m/m, prelim up 1.6%. Capital flows data from Japan's Ministry of Finance for the week ending October 11th, showed that foreigners were net sellers of 168.3 yen in Japanese stocks, contrasted with their net purchases of 476.8 billion yen a week earlier. Foreigner investors scaled back their net purchases of Japanese bonds, purchasing a net 49.6 billion yen, from net purchases of 254.3 billion yen the previous week. Meanwhile, Japanese investors reduced their purchases of foreign stocks, with net purchases of 16.5 billion yen as opposed to 162.5 billion yen a week earlier. Japanese investors net purchased 134.8 billion yen in foreign bonds, contrasted with being net sellers of 317.6 billion yen the previous week. Prime Minister Junichiro Koizumi pledged to expedite banking reforms and apply fresh fiscal easing measures.
The Nikkei index closed the week at 9086 up 557 points from previous week’s close.
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Source: Mecklai Financial Services
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