INR Weekly

INR Weekly
November 16, 2009
CMP: Rs.46.37/USD



Fundamental Analysis
Weakness was witnessed in Dollar as the pair traded lower in four out of five trading sessions this week. Dollar futures opened the week at Rs.46.70/$ and touched low of Rs.46.32/$ closing the week near the same levels.The driver of the pair continued to be dollar index as it traded at 15 years low against major currencies. However bottom hunters came to the rescue of dollar index as it rose from critical support in what seemed to be a technical buying rather than any fundamental driven news.

 The Yuan – Test

With President Obama all set to begin his 9 day maiden tour to China on Thursday, Jitters can be felt across currency markets which for some time now have been waiting for China to Strengthen its yuan against other
currencies. Apart from U.S other countries have been also demanded appreciation of Yuan, European Central Bank President Jean-Claude Trichet and Japanese Vice Finance Minister Yoshihiko Noda last week
called for the yuan to gain, while an International Monetary Fund report published Nov. 7 said the currency was “significantly undervalued.” So why so much fuss regarding the yuan? And why cannot Chinese quote the Renminbi (Yuan) on basis of free market pricing when it boosts to be a global economic power house. Yuan is a highly controlled currency with heavy intervention from Chinese Central bank. The latest “reform” was made in May 2007 where the floating band of RMB trading prices against the US dollar in the inter-bank spot foreign exchange market was enlarged from 0.3% to 0.5%, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will float within a band 0.5 percent around the central parity publicized on the same day by the China Foreign Exchange Trading System.
A controlled yuan is in favor of Chinese economy as it provides a competitive advantage to cheap manufacturing items which form backbone of Chinese Exports. Since 2008 yuan has been trading in range between 6.80/USD and 6.87/USD despite claims that it should be much stronger. The International Monetary Fund estimated that, by purchasing power parity, one United States dollar was equivalent to approximately 3.462 in 2006, 3.621 in 2007, and 3.798 in 2008.


India’s Industrial Production & Credit Growth- Two Contrarian Indicators


India’s industrial production grew more than economists' forecast in September, adding to positive economic signs as policy makers consider when to rein in stimulus measures. Industrial production rose 9.1 percent from a year earlier after gaining a revised 10.96% percent in August. Commercial credit however continued to be negative indicating that despite high industrial production, corporate’s are going for lower bank credit,  commercial Credit has been falling since January onwards and was 10% down previous week. The heightened QIP activity and higher lending rates supported by higher bond yields could be the causes. This has lead to banks bringing down interest rates of some secured products like home loans and car loans as well as reducing deposit rates, which typically indicates heightened liquidity. As accepted by RBI Deputy Governor Shyamala Gopinath, the next challenge for Indian policy makers is the timing of the withdrawal of monetary stimulus, without hurting the recovery.



Conclusion
Looking at the trend of USDINR for coming days we feel Indian equity markets and Dollar Index to be prime drivers of currency pair. Ample liquidity has supported equity markets in India, while weakness in dollar index has added to the momentum We expect bearishness in continue in USDINR currency pair. In medium term (1-2 months) we expect USDINR to touch 45.50 -45 levels.