Daily Market Commentary: Thursday ,September 6th 2012

Domestic and International Highlights:

The Indian Rupee opened at 55.79 levels against the dollar after closing yesterday at 55.90 levels.

The Indian rupee slipped down to its lowest level in three weeks on concern about the European Central Bank's ability to unveil a concrete plan to help debt-laden Euro zone region. The intra day range for the rupee is expected between 55.60-56.10 levels

The Asian markets are trading mixed after the European Central Bank reported to buy unlimited amounts of short-term sovereign bonds to cap surging borrowing costs in indebted euro zone states.

The speculation on rate cut by ECB has reduced after the announcement that the planned bond purchases would be unlimited, but also sterilized i.e. no increase in money supply targeting short maturities bond only and without any yield targets.

The markets have been expecting Draghi to unveil a bold plan after Thursday's monthly policy meeting. But while he is likely to deliver a framework for new bond purchases, no details of planned amounts or explicit targets for yield spreads or levels of interest rates will be announced.

Other ECB policymakers are also seeing a greater urgency to help Spain and Italy to prevent the euro zone crisis from deepening.

The euro had been rallying on hopes of some concrete steps from the ECB after its meeting today making the investors cautious. This meeting is very crucial as expectations are extremely high. If the ECB does not deliver any concrete measures then we can see a down ward rally across the global market.

The US 10 year treasury yields are trading 2bps higher at 1.59%, while Spain's 10yr yield fell 16bp, Italy -15bp to its 3 ? month low levels.

The Indian 10 year bond yields fell for a third successive session on Wednesday and ended 3 bps lower at 8 .18%. The cash deficit in the banking system fell to its lowest since October. The overnight benchmark rate fell to 7.71% on Wednesday, after slipping below 8% for the first time in 11 months on Tuesday.

Outlook: The Indian Rupee is in a range of 55 - 56 levels with a weaker bias. Exporters still maintain covers near 55.80-56.00 levels as suggested and importers had been earlier suggested to cover near 55.20-55.40 levels. The pair still stays bullish targeting 56.00 levels. Breaking of 56.20 in USD/INR will be quite bullish for the pair again. It is important to track euro's impact on rupee in the recent days to track USD/INR inherent strength or weakness.

(Source: Corporate Communications Team, India Forex Advisors Pvt. Ltd.)