In the last week, major currencies closed almost on a flat note. The US Dollar Index (DX) traded with a negative bias in the last week but closed flat. The Indian Rupee (INR) depreciated marginally by 0.3% to close at 46.94 and the Euro fell slightly by 0.1%. Mildly bullish sentiments in the last week coupled with the European banks stress test results kept sharp gains in the currencies under check. Economic data out of the US in the last week continued to come on the negative side.
In the initial part of the week, equity markets traded on a mixed note awaiting the European banks stress test results. However, the results of the tests came in against expectations as 92% banks passed the tests. On the back of this, sentiment turned bullish by the end of the week as the stress tests data showed that the European banking scenario is not as bleak as expected.
The INR depreciated to a level of 47.41 in the last week as a weak start on the equities front in the beginning of the week restricted gains in the currency. Week-on-week too, the currency weakened as sentiments remained largely mixed. FII inflows in India in the month of July totaled Rs.10,126cr. In the month of June, FIIs bought equities worth Rs.10,508cr and year-to-date inflows stand at Rs.41,203cr.
· The demand for the US financial assets also declined in May. Global demand for the financial assets totaled $35.4 billion in May as against the previous figures of $81.5 billion in April.
· In the last week Ben Bernanke in his testimony before the Senate Banking Committee said that US has very little probability of being affected by deflation. However, he also added the Federal Reserve has possible tools to prevent it. Moreover, the Fed chairman also said that the employment scenario remains a major concern for the US.
· Unemployment claims in the US increased by 37,000 to 464,000 in the last week.
· Existing home sales increased by 5.37 million in June as against forecasts of 5.18 million.
· Current account deficit in the Euro area widened in the month of May. The European central bank said that deficit increased by 5.8 billion Euros in May from 5.6 billion in April. Markets had expected the deficit to narrow down to 3 billion Euros.
· The Euro zone manufacturing PMI increased to 56.5 in July from 55.6 in June. Markets had expected the index to decline to 55.2. The Services PMI also increased to 56.0 in July as against 55.5 in the earlier month.
Fundamental Outlook
The Reserve Bank of India (RBI) is expected to give its monetary policy review on 27th July, 2010. The central bank is expected to tighten monetary policy by raising interest rates by another 25 basis points. RBI has lifted rates three times since March by 25 basis points each. In this week we expect the INR to appreciate as higher risk appetite coupled with continuing inflows in the country will help support gains in the currency. Weakness in the DX is also positive for the INR. We expect the INR to trade in the range of 46.75 - 47.60 in this week with an appreciation bias.
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