Saturday, 26 July 2014
By Dipen Shah, Sr. Vice President, PCG Research, Kotak Securities:
It was a very quiet week for the Indian Rupee, with highs and low between 60.30 and 59.98, with most of the trading confined between 60.05 and 60.25. Volatility has compressed to levels last seen during 2011 levels. On exchange near month options on USD/INR has seen implied volatility trade at sub 4% for ATM strikes and on OTC, sub-6% is being offered. Economic data flow was better than consensus from the Euro zone but was mixed from US. There was no major economic news which was scheduled from India. Rupee therefore was bracketed due to month end demand from oil marketing companies and inflows from FIIs and also on account of FDI.
In the last the monetary policy meeting, Bank of England members continued to hint towards policy normalisation. Currently the BOE signal rates are at 0.5%. Some of the members expressed alarm at the slowdown in the wage growth. All in all it appears that BOE is gradually preparing the economic agents for a shift in monetary policy. Over the next few meetings, we would be eager to see if one or two members vote for a hike, as that can be a definitive sign of a rate hike. In Euro zone, the flash manufacturing and services PMI was much better than expected. The euro zone's private sector expanded at the fastest rate in three months in July, although faster growth in new business was driven mainly by companies cutting prices. Markit's Composite Purchasing Managers' Index (PMI) rose to 54.0 in July from 52.8, its highest since April. Any number above 50 indicates expansion. The services sector PMI across the 18-member bloc performed better than street estimates. Individually, German manufacturing and services PMI readings were much better than street estimates, whereas France had a disappointing manufacturing sector reading but compensated by a robust services sector data.
In US, though home sales for the month June was better than expected, but US housing starts were much weaker than street estimates. In India, RBI tweaked the FII investment limits in government bonds. The Reserve Bank increased FII limit for investment in government securities by USD 5 billion, within the total cap of USD 30 billion. The limit has been enhanced by reducing the investment limit for long term investors from USD 10 billion to USD 5 billion.
Over the coming week, traders have plenty of data to chew from the major world economies. From Euro zone, German retail sales, Euro zone consumer inflation and Euro zone unemployment rate will be closely watched. A stronger than expected inflation and better than expected jobs report from Euro zone can provide some relief to a weak Euro and we can see the Euro/INR post some short covering gains. US economic data docket is full with regional manufacturing surveys, employment report from ADP and the BLS for the month of June. However, the center of attraction will remains the June FOMC meeting scheduled on next Wednesday. With a US unemployment claims plumbing 8.5 year lows, we expect the US unemployment rate to follow suit and head lower. As a result, pressure to normalize monetary policy will increase in the coming months on the US Fed. A hawkish policy stance will be positive for the US Dollar. Apart from the US FOMC, traders will also watch other economic releases like US ISM manufacturing, Japanese industrial growth number and Indian manufacturing PMI.
For the Indian Rupee, we expect the currency to trade sideways against the US Dollar, between 59.60/80 and 60.20/40 on spot but against the Euro, it can trade within a positive bias. GBP is expected to find strong support between 100.00/101.00 levels on spot and can see a bounce back from those levels. At the same time, Yen will remain weak against the Indian Rupee.
