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FORTNIGHTLY OUTLOOK FOR CURRENCIES<br />
IInves<strong>to</strong>rs continued <strong>to</strong> shelter<br />
themselves in safe havens like<br />
the US dollar and US treasuries<br />
in the wake of persistent<br />
global growth concerns and the<br />
European debt crisis. The US dollar<br />
index, a broad <strong>me</strong>asure of the dollar’s<br />
performance against six major currencies,<br />
rallied <strong>to</strong> 79.75 from 77.<br />
The IMF forecasted the world economies<br />
will grow at a much slower pace<br />
for another one-and-a-half year.<br />
Moreover, no concrete words ca<strong>me</strong><br />
from the European Union, causing<br />
more pain <strong>to</strong> risky assets.<br />
Macro-economic indica<strong>to</strong>rs are showing<br />
weakness around the globe. PMI<br />
numbers of developed markets are<br />
indicating slower growth in all the<br />
industries. Unemploy<strong>me</strong>nt rates in the<br />
US and Europe are high at around<br />
9.1% and 10%, respectively. The<br />
housing sec<strong>to</strong>r weakness continued in<br />
the US and UK leading <strong>to</strong> poor<br />
consu<strong>me</strong>r spending. Also, inter-bank<br />
lending rates continue <strong>to</strong> reflect lack<br />
of confidence in the money markets.<br />
All concerns, coupled with the<br />
ongoing dollar squeeze make the<br />
dollar a good bet. The dollar index is<br />
likely <strong>to</strong> test the mark of 81 in the<br />
coming fortnight.<br />
The euro made a nine-month low<br />
against the US dollar, the worst hit<br />
among all the major currencies. The<br />
single currency is under im<strong>me</strong>nse<br />
pressure on account of contagion<br />
fears in the European economies.<br />
Inves<strong>to</strong>rs went short on every rally on<br />
the euro, which led <strong>to</strong> a sharp fall<br />
from $1.38 <strong>to</strong> $1.3160 within two<br />
weeks. Though the German parlia<strong>me</strong>nt<br />
passed the enhanced EFSF<br />
(European Financial Stability<br />
Facility) with a vast majority, the<br />
inves<strong>to</strong>rs remained sceptical about the<br />
long-term solutions for European<br />
peripheral countries.<br />
Higher CPI numbers <strong>to</strong>o did not<br />
support the currency and expectations<br />
of a rate cut was largely ruled out. The<br />
coming fortnight is very crucial for<br />
the Euro zone as the markets await the<br />
final con<strong>to</strong>urs of an enhanced EFSF.<br />
On the other hand, troika (IMF, EU<br />
and ECB) will decide upon the next<br />
tranche of aid <strong>to</strong> Greece.<br />
Currently, inves<strong>to</strong>rs are very sceptical<br />
about the Euro zone and with every<br />
disappoint<strong>me</strong>nt, inves<strong>to</strong>rs are going<br />
short on the EUR/USD pair. With a<br />
bearish outlook on the pair, we expect<br />
the EUR/USD pair <strong>to</strong> trade in the<br />
range of $1.2850 <strong>to</strong> $1.3350.<br />
The sterling was broadly under<br />
pressure in line with the euro. It fell <strong>to</strong><br />
$1.54 from $1.57 against the US<br />
dollar in the last fortnight. Rising<br />
expectations of additional quantitative<br />
easing weighed on the exchange<br />
rate as the Bank of England showed<br />
willingness <strong>to</strong> expand its monetary<br />
policy further.<br />
The central bank looks set <strong>to</strong> increase<br />
its efforts <strong>to</strong> stimulate the ailing<br />
economy in order <strong>to</strong> avoid falling<br />
back in<strong>to</strong> a recession. Going forward,<br />
we may see a sustained downward<br />
pressure on GBP/USD against the<br />
backdrop of broad strength in the US<br />
dollar, coupled with deteriorating<br />
outlook for the UK economy.<br />
The funda<strong>me</strong>ntals are weak for UK<br />
and any rally should be considered as<br />
a selling opportunity. The likely range<br />
for the pound for the fortnight is<br />
$1.55 <strong>to</strong> $1.52 with a downside bias.<br />
The Japanese yen broke the usual<br />
appreciation trend <strong>to</strong>wards the end of<br />
the fortnight. The US GDP ca<strong>me</strong> in<br />
better-than-expected at 1.3% for the<br />
June quarter. This develop<strong>me</strong>nt gave<br />
the US dollar so<strong>me</strong> positive ground<br />
against the Japanese yen and the<br />
JPYINR pair surged <strong>to</strong> 77.25.<br />
However, quarter-end exporters’<br />
dollar selling ca<strong>me</strong> in at these levels.<br />
On the economy front, the newest<br />
Tankan economic survey for major<br />
Japanese industries in Q3 showed<br />
welco<strong>me</strong> improve<strong>me</strong>nt in the manufacturing<br />
sec<strong>to</strong>rs. In the coming<br />
fortnight, we expect the Japanese yen<br />
<strong>to</strong> be in the range of 76 <strong>to</strong> 78.<br />
The Indian rupee remained under<br />
tre<strong>me</strong>ndous pressure, depreciating by<br />
almost 8% <strong>to</strong> 10% in the last month.<br />
Capital outflows, coupled with the<br />
dollar squeeze in the Asian markets<br />
led <strong>to</strong> a sharp decline in the rupee.<br />
The RBI reiterated that it won’t<br />
intervene <strong>to</strong> protect any particular<br />
level. However, it will intervene in<br />
the Forex market only <strong>to</strong> control the<br />
intraday volatility of the rupee.<br />
According <strong>to</strong> data from SEBI, FII<br />
outflows since 20th September is<br />
$1,706 million from equity and debt<br />
markets. The weakness in rupee is<br />
likely <strong>to</strong> continue in the coming<br />
fortnight as the run on the US dollar<br />
may lead <strong>to</strong> further weakness in<br />
overall Asian currencies.<br />
On the economic front, the current<br />
account deficit for June quarter ca<strong>me</strong><br />
in at $14 billion against $12 billion in<br />
the corresponding period last year.<br />
Additionally, fiscal numbers point <strong>to</strong><br />
a higher-than-estimated fiscal deficit<br />
for the current financial year. Both the<br />
external and internal fac<strong>to</strong>rs indicate a<br />
weaker rupee in the short-term. The<br />
USDINR pair may test the levels of<br />
49.90-50.00 in spoT.<br />
Beyond Market 10th Oct ’11 It’s simplified... 33