Daily Market Commentary: Tuesday, September 04, 2012

Domestic and International Highlights:

The Indian Rupee opened at 55.39 levels against the dollar after closing at 55.53 levels yesterday. The rupee rose to its highest in more than a week in opening trade on account of the GAAR deferment proposal and steady international factors. The intra day range for the rupee is expected between 55.25-55.55 levels.

The weak business surveys from the Euro zone and China shows a spreading contraction in manufacturing business around the world in August, as the damage on the global economy on account of the Euro zone's troubles. New export orders fell even in India, the annual exports fell 14.8% to $22.4 billion in July, while imports fell 7.6% to $37.9 billion, leaving a trade deficit of $15.5 billion.

The Asian shares are trading steady while currencies are gaining against the dollar as investors saw weak regional and global economic data as raising the prospect for further stimulus from central banks to support.

The comments by Draghi that the ECB's purchases of short term sovereign bonds would not breach the European Union's taboo of directly financing Euro zone economies has increased the market expectations of the ECB meeting on Thursday. The central bank is speculated to cut its benchmark interest rate to 0.5% from 0.75% on Sept. 6.

The European Union's outlook was cut to negative from stable by Moody's after ECB President Mario Draghi told officials he would be comfortable buying three-year government bonds to lower borrowing costs for nations in financial distress.

The Moody's has changed the outlook of the EU's AAA long-term issuer rating to negative from stable, citing negative outlooks to the AAA sovereign ratings of Germany, France, the UK and the Netherlands, which combined account for about 45% of the EU's budget revenue.

The US Treasury yield is trading higher at 1.56%. The benchmark 10-year bond yield ended 2 bps lower at 8 .22%. India will sell $2.9 billion of bonds on September 7, the RBI said in a release on Monday. The markets have broadly factored in no rate cut in September, so bonds are likely to remain stable as long as the cash remains comfortable.

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 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 to be noted that rupee did not appreciate in the same manner as the dollar weakened against the Euro and pound internationally signaling extra weakness in rupee.)

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