Weekly Forex Research (21 February 2009)

Summary: Global currency market witnessed most volatility as risk aversion gripped financial market during the week. Asian currencies including Rupee came under fire with their biggest weekly drop in four months, pressured by significant fall in global equities, on worsening ecession concern. Rupee, that was trading in increasing narrow range for the past several weeks, broken down beyond 50 level in both spot and futures market.

Market Analysis:
World equities market tumbled across the Globe. Asian benchmark MSCI Asia Pacific Index dropped 6.98% and SENSEX gave up previous week’s gain with weekly decline of 8.22% due to combined factors like disappointed interim budget announcements by government, expected interest rate cut by RBI, ballooning trade deficit and weak global sentiment.

Asian currencies including Rupee came under fire fueled by sharp drop in equities and weaker exports. Spot Rupee dropped against USD and EUR by 2.62 and 2.45% respectively during the week. After a record fall on Wednesday, Rupee recovered marginally on Thursday due to the Reserve Bank of India’s intervention and the sale of dollars by some corporate houses. USD/INR futures came under pressure on Friday on what looks to be profit taking and guided by recovery in EUR/USD pair. It looks like levels closer to the psychological 50.00 mark is a major hurdle for any further appreciation of Dollar. However, increasing number of market participants now believe Rupee to fall more by year end due to no sign of global market recovery.

Macro Analysis:
Indian WPI as on Feb 07 continued to tumble with prices rising 3.92% y/y versus previous week of 4.39% y/y. While the disinflation trend continues beyond base effects, WTI prices indicating a clear signal that demand remains under pressure given the nervous business sentiment and job loss fear looming across the country.
On monetary policy, now since RBI has plenty of room to ease rates further, the probability of its happening has increased significantly. Any announcement of rate cut would be supportive for Dollar. On fiscal policy, FinMin Pranab Mukherjee said the government will provide additional resources to stimulate demand and more to help key sectors such as housing, infrastructure and real estate. It is widely expected that the fiscal deficit will rise because the government spending would rise in the coming times in order to support the economy from overcoming the recession.

Technical Analysis: Sharp rally to past 50 is setting bulls on strong footing and with the 7-week consolidation decisively broken on the upside, bullish trend is set, targeting higher hurdle at 50.58 and then 52. However, there may be profit booking at higher level of USD/INR if the global market starts consolidating in the week ahead. However, any significant downside move in global equities next week would provide up side opportunity in USD/INR trade. Watch out for every move in Equities the week ahead.

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