E - Mecklai Forex Corner

Indian news

The Rupee opened unchanged from the previous week’s closing level at 46.12. The absence of cash dollar outward remittances due to Columbus Day holiday in US combined with bunched up inward remittances after a festival holiday in some of the centers in India last Friday saw the Rupee firm up to 46.08. The upcoming India Millennium Deposit issue by India’s largest state run bank, promised improved dollar supplies and aroused hopes of Rupee recovery, however small it may be. But the sentiment took a sudden turn during the latter part of the week. The Reserve Bank of India (RBI) in its review of mid-term monetary and credit policy announced the restoration of limits on exchange earners’ foreign currency (EEFC) accounts to its pre-August levels. It said that it is meant to be used for the account holders’ current account trade transactions and other permitted payments, and the balances should be held in the form of current accounts. It also barred the banks from providing any credit facilities, either funds based or non-fund based, against the EEFC balances. Now the exporters are permitted to hoard dollars but it would incur a carry cost. The RBI lowered India’s GDP growth estimate for the current fiscal by half a percentage point to 6 – 6.5% from its earlier estimate of 6.5 – 7%. It said that despite a normal rain in terms of quantum, the agricultural output remains uncertain in the wake of deficient rains in some parts of India, while eastern parts of the country is affected by floods due to excessive rains. The slow down in the industrial production seen during the first four months of the current financial year, which was lower at 5.4 per cent than 5.9 per cent recorded during the corresponding period of the previous year, may continue to thwart economic growth. Later that evening Standard and Poor’s, the international rating agency downgraded the outlook on India's double-'B' long-term foreign currency issuer rating from positive to stable. These events destabilised the Rupee once again as fresh dollar demand from corporates and banks pushed the Rupee down to 46.35 from 46.20 and into a declining trend. On Friday, the international oil prices came into the limelight once again as crude oil prices climbed towards the recent 10-year highs. The benchmark IPE Brent was closer to $ 35 a barrel as a result of a series of events in Middle East. Tensions mounted after Israeli armed forces attacked Palestinian positions after two Israeli army men were killed by Palestinian mobs. An apparent terrorist attack on US Naval ship killing 17 US sailors set the already edgy oil prices on fire. Hectic dollar buying by banks and nervous corporates led the Rupee to fall headlong to 46.45 - a new low against the dollar. It had been on a slow and painstaking process of recovery from its 19 September intra-day low of 46.42, before this current drop. However, it recovered to 46.33 when dollar sales from exporters emerged at levels near 46.42/45 and closed a little easy at 46.35.

The Rupee is likely to remain vulnerable in the days to come, as sizable capital inflows are not expected with the current uncertain economic outlook. The international oil prices are still firm around $ 33/Brl, far above the comfortable levels. The Standard and Poor’s revision on the outlook was based on the Government’s inability to accelerate the pace of economic reform and its failure to convince political parties for the same. Adding to this is its inability to pursue hard decisions to correct weaknesses in public finances and modernise the country’s pervasive and largely under performing public sector. Also most of the State Governments have not begun the process of restructuring their loss-making electricity boards. The high borrowing (about 66% of GDP) requirement of all levels of Government and their enterprises would eat into 40 per cent of domestic savings, constraining growth and development. However, the RBI Deputy Governor Y V Reddy said that he was surprised and disagreed with a downward revision of the country's foreign currency outlook by Standard and Poor. He said the fiscal situation had shown signs of improvement. He reminded that Moody's have confirmed their current positive outlook.

Despite the easing of repo rates, the call rate rose consistently from its opening level of 8.50-9%.

Expectations of rising short-term interest rates due to a weaker spot induced demand for funds. The call rate climbed to 11% on Friday as the leading lender abstained from the market. On Saturday it was trading just under 11%. Initially the forward premiums eased on the back of a steady spot and falling short-term interest rates. The central bank reduced the yields for the sixth successive time by uniform 25 basis points on the repo auctions to 8.5%. However, as the spot weakened later during the week, persistent paying interest by corporates and banks led the premiums to harden. After dipping to an intra-week low of 4.01% it progressively rose to touch 4.87% on Friday before closing at 4.76% compared to last week's close of 4.18%. Meanwhile, the yields on 14-day and 91-day treasury bills auction rose to 10.20 % from 8.89% and to 9.94% from 9.61 respectively.

The BSE Sensex crashed to a 17-month low of 3714 on Friday before closing at 3739; a loss of 353 points during the week. The domestic markets shrugged off the scintillating performance of India’s top software company Infosys, which reported 135% rise in net profit at Rs. 154 crore for the quarter ended on 30 September, compared to 65.71 crore for the corresponding quarter last year. The positive news was swept aside by flow of unending worries on both domestic and international front. The skyrocketing energy prices joined forces with the flurry of earning warnings by major US technology companies pushing the NASDAQ to its lowest level since November 99 to 3055 on Thursday. The bearish global trend influenced the local bourses. Although the NASDAQ has made a dramatic recovery on Friday with an 8% overnight gain of 242 points, it is unlikely to turn the trend in the domestic markets.

International News

Yen

The Yen started the week on the backfoot following the failure of yet another lifer, the Chiyoda Life Insurance Co. $/Yen climbed to a weeks high of 109.13 but lacked momentum to breach the 110.0 mark with US and Tokyo closed on a holiday. But the Japanese unit staged a strong comeback buoyed by August Pvt. Sector machinery orders that came in way above market expectations at +26.6% m/m (f/c 9.6%). The number provided just the excuse traders needed to dump the dollar, as they had been frustrated with the greenback’s inability to break the 110.0 resistance level. $/Yen drifted lower for the rest of the week hitting a low of 107.35 as tension in the middle-east spooked the US stock markets with the Dow crashing by 379 points. $/Yen closed the week at 107.82 as the pair regained some of the previous day’s losses following a strong rebound in the US stock markets.

GBP

UK September PPI came in stronger than forecast with input prices rising 2.8% on the month (f/c +1.5%) while output prices climbed 0.2% (f/c +0.1%). Cable started a gradual rise against the Dollar on Tuesday following the release of the September RPIX that came in +2.2% on the year. Retail sales also climbed by 2.9% y/y compared to 1.7% in August. The British unit hit a high of 1.4579 before giving up some of its gains. The crisis in the middle-east that sparked the sell-off in the US stock markets on Thursday provided some momentum to Cable as it powered itself to a week’s high of 1.4796 on Friday, only to be thwarted by the strong resistance at 1.48. Following its third consecutive failure in less than a month at the 1.48 level, traders sold the British unit all the way back to a low of 1.4502. The rebound in the Nasdaq and the Dow also aided the Dollar against the Pound with Cable closing the week at 1.4515.

Euro

The Euro maintained its gradual descent throughout the week despite some good economic data coming from the Euro zone. EU July industrial production climbed 0.5% on the month while German inflation for September was revised higher to 2.5%. The single currency hit a week’s high of 87.64 cents on Wednesday following strong German industrial production numbers that came in +5.6% on the year. However it could not hold its gains and retreated back to the mid 86 cents mark. The Euro failed to capitalize on Wall Street’s losses on Thursday partly due to large sales in the Euro/Swiss cross that hit a life-low of 1.5026 on Thursday. Fears of EU intervention allowed the Euro to keep its head above the 86 cents mark, but the underlying sentiment remained overwhelmingly bearish. The Euro crashed to a week’s low of 85.28 cents on Friday as US stock markets returned back with a vengeance and on comments from the Republican candidate’s aide that supporting the Euro intervention was a mistake. Euro/CHF also tumbled to a fresh life-low of 1.4995. The single currency closed the week below the 86 cents mark at $0.8550.

USD

The dollar continued to sway to the oil tune this week in the absence of any major economic data. US stock markets started the week a trifle shaky on interest rate worries following the unexpectedly strong unemployment numbers released last week. The markets were further spooked by the rising crude oil prices that steadily rose to levels not seen since the gulf war & on profit warnings by key companies. On Thursday, the Dow crashed by 379 points while the Nasdaq lost 93 points following heightened tensions between Israel & Palestine and an apparent terrorist attack on a US Naval ship in Yemen. But on Friday, the US stock markets and the Dollar rallied back aided by a surge in the US stock indices and a slight pull back in crude prices. Crude hit a high if $34.11/Brl before easing to $31.92/Brl. The Nasdaq roared back posting its second highest daily gain ever of 242 points, while the Dow closed 157 points higher. A higher than forecast 0.9% m/m rise (f/c 0.5%) in September PPI was offset by an equal 0.9% rise in retail sales.