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NRIOL.COM - Forex News and Analysis |
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October 28, 2002
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Local News and Views:
Rupee started its week on a strong note due to increase in dollar supplies as companies brought in overseas loans & exporters converted proceeds from EEFC A/cs putting upward pressure on the Rupee. The Rupee closed at 48.35/36 on the 21st but the pressure strengthening the Rupee eased on 22nd as a large automobile company bought dollars prompting the Rupee to end slightly weaker at 48.36/37 that day. From then, there was no looking back. Exporters’ who were very sensitive to the Rupee’s depreciation held back dollar supplies anticipating more depreciation in the Rupee. Importers’ who were very happy with Rupee’s recent appreciation came in to hedge payables putting more pressure on the Rupee. State run banks swiftly came in to avoid undue volatility in the market to sell the dollar at 48.44 levels. The Rupee reached a high of 48.44 as bankers build long dollar positions anticipating more corporates to hedge their payables. Rupee closed on that day at 48.3850/3950 due to state bank selling. Since Wednesday the Rupee was steady as bankers unwound the long dollar positions, as the follow through demand from corporates did not materialize. Rupee closed the week at 48.37/38 drawing support from the dollar’s weakness overseas and lack of demand from corporates.
Looking ahead the Rupee is expected to trade slightly weak. The strength in the Rupee would be hampered by possible demand from oil companies and state run firms as they buy dollars for the customary remittances at the end of the month. Traders would shy away from taking huge positions before the monetary and credit policy on Oct 29th. Data from SEBI shows that FIIs have sold $143 mln worth of Indian assets in Oct, which could also weigh on the sentiment.
In the forward market the premiums edged up on concerns that RBI might not cut key interest rates in the credit policy. The 6-month premium ended up at to 3.95% at the close of the week. In the bond market traders avoided taking fresh positions before the credit policy and did show more interest to close out positions, which pushed up yields.
Rate cut in the credit policy looks tentative due to lack of clear steady economic growth outlook. RBI lowered its benchmark bank rate to 6.5% last year but since then there has not been any sizeable improvement in the credit offtake. Moreover the farm sector is expected to perform badly this year due to the worst drought in 15 years. The benchmark 10-year yield closed at 7.06% on Friday. The risk premium for corporate bonds over G-secs also rose to around 70 bps from 65bps. The RBI received repo bids for 15000 crs rupees at its daily auction on Friday, of which it accepted 80% at 5.75 percent, which shows that liquidity in the system is abundant. RBI is expected to scale down its growth forecasts in the credit policy. RBI had estimate a growth rate of 6-6.5% for 2002-03. RBI had stated in the last
credit policy in April that interest rates would be cut if liquidity tightens. But then the drought happened and the liquidity continued to be abundant. Moreover increasingly RBI’s bank rate has lot its significance as a good benchmark. RBI might just cut the repo rate from the existing 5.75% to adhere to its softer interest rate bias and also to encourage banks, which are flushed with funds, to look at consumer & industrial loans at competitive rates. This might serve the purpose of the Central bank to improve the credit offtake thereby stimulating growth.
International News:
US Dollar (USD):
The dollar ended the week marginally lower against the European majors with buoyant US housing data and resilient equities largely offsetting the effects of a sharp fall in US durable good orders and consumer sentiments. However, the greenback had its biggest weekly decline against the yen since mid-August on expectations Japanese Prime Minister Junichiro Koizumi will water down a plan to clean up $420 billion of bad loans held by banks.
The US Conference Board's leading indicator index dipped 0.2% in September and this was the 4th consecutive month of decline. The Fed’s Beige Book underlined the ongoing lethargy in the U.S. economy and the report has rekindled hopes that the Fed could ease interests rates after all at the November 6th meeting. According to the Beige Book, retail sales have softened across the country, partly due to the sharp decline in auto sales from previous peaks. The job market also remained stagnant, and manufacturing activity decelerated. On a better note,
homebuilding and residential real estate continued to exhibit resilience, though commercial real estate has weakened. The September durable goods orders figure plunged 5.9% in September, posting the steepest drop since November 2001. August durable goods orders were revised downward to a 0.6% decline from a 0.4% dip previously reported. Adding to the economic gloom, the University of Michigan consumer confidence index fell to its lowest level in nine years. The final October reading of the index fell from 86.1 to 80.6 in September. On a positive note, the housing market continues to surge ahead, with new homes sales rising to a record 1,021,000 in September versus a previous record-setting 996,000 units. Existing homes sales climbed as well, increasing to 5.4 million versus 5.28 million the month before.
The DJ Index closed at 8444 up by 122 points while Nasdaq closed at 1331 up by 43 points from the last week’s closing.
Euro (EUR) – (O-0.9795 H-0.9926 L-0.9768 C-0.9872):
In a positive development for the euro, the Irish voted by 63% majority in favor of the Nice treaty, despite voting it down one year ago. French consumer spending dropped unexpectedly by 1.2%, a full percentage point more than what was expected. Eurozone's August trade balance fell to a 9.6 bln surplus from 13.9 bln in July despite August imports falling 6% y/y while exports were unchanged. Still, the surplus was larger than the 6.7 bln expected by the markets. Last week, German Finance Minister Hans Eichel admitted that Germany will likely breach the 3% budget deficit limit this year given the prolonged anemic economic growth. The German government has been one of the most vocal proponents of an interest rate cut to jumpstart economic growth, but it remains far from certain that the ECB will cave in to its request.
UK Pound (GBP) – (O-1.5637 H-1.5689 L- 1.5520 C-1.5625):
A gloomy report from the Confederation of British Industry indicated a sharp deterioration in manufacturers' confidence. The CBI quarterly industry trends survey fell to -33 from -29.0, worse than expectations for a rise. UK retail sales rose 0.4% in September as against a 0.7% rise in the previous month but were still better than the consensus forecast rise of 0.3%. UK Q3 GDP growth was also slightly better than expected at 0.7% q/q against the forecast growth of 0.6%. The Bank of England's MPC voted in a 6-3 split to keep interest rates unchanged at 4%. This marks the first time since February that any committee member has voted for a rate cut. The three members urging for a rate cut expressed concern over the deteriorating global economy while the other six cited ballooning debt levels as grounds to retain current rates. The split vote is seen as increasing the chances of a rate cut by the end of the year.
Japan Yen (JPY) – (O-123.13 H-124.61 L-123.05 C-124.01):
Japan is on track to enter its fourth consecutive year of deflation - a phenomenon not seen in any post-war industrialised country - as the country's core consumer price index tumbled for the 36th consecutive month in September. The core nationwide CPI fell 0.9% y/y in September. Mr. Takenaka, the head of the Financial Services Agency, was this week forced to postpone the announcement of his plan to accelerate the disposal of bad loans after objections from members of the ruling party. He has stressed it would be difficult to pursue aggressive moves to clear up bad debts in the banking sector without equally strong efforts to tackle deflation. Consistently falling prices whittle away at revenue and undermine companies' ability to repay loans. But Masaru Hayami, BoJ governor, said it was inappropriate for the central bank to adopt an inflation target. Meanwhile, pressure continues to mount for Japan to follow through with reforms. Credit rating agency Fitch announced that a delay in banking system reforms may lead to further downgrade of Japan's sovereign credit rating.
Monody’s upgraded Japan's foreign currency country ceilings for bonds and bank deposits to triple-A due to a change in methodology, It's important to note that similar upgrades were given to several other industrialized countries as well. However, Moody's have not changed their overall assessment of the Japanese economy.
The Nikkei closed at 8726 down by 300 points from last week’s closing.
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Source: Mecklai Financial Services
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