Political Blockage Hits

The short trading week of the Indian Rupee (INR) started on a high note and continued to rise till the expiry day by registering fresh highs but was off the high on the same day itself. The INR was sharply lower after the holiday while ending the week around the weekly lows. The lower start may set the stage for a lower beginning as the recent fall in INR not has weaken the charts but is also supported by firmer domestic equity markets on rising capital inflows. The risk on sentiments in global markets also supported for a stronger cause in INR.

The initial weakness in INR can be attributed to the political logjam which had stalled the parliamentary proceedings for the four straight sessions. The subdued tone of equity markets also supported for a weaker cause in INR. The Moody’s retaining its stable outlook on India’s sovereign rating, citing strong economic expansion and a healthy savings and investment rate that exceeded other emerging economies.

The Moody’s stable outlook and ease in parliament logjam where the speaker allowed to debate on FDI in Multi brand retail U/s 184 which allows voting providing the opportunity for the government to move ahead with its policy reform agenda. Strong risk on sentiments continued to support the domestic and global markets as the Whitehouse and Senate is expected to come over a budgetary deal avoiding the Fiscal cliff. The US government said that it will not push the economy off the rails and will definitely fix the fiscal cliff by the end of December.

India’s economy extended its long slump in the last quarter, with lower-than-expected growth keeping it on track for its worst year in a decade and underscoring the urgency of politically difficult reforms to spur a revival. The economy grew 5.3% from a year earlier in the July-September period, below the 5.5% posted for the three months ending in June.

The global markets remain dominated by the fiscal cliff concerns from US which is set to undergo rise in taxes and larger spending cuts from Jan 2013. The Moody’s decision to downgrade the ESM gave an otherwise quiet market a small jolt which churned the gains in bourses across the globe while ending the session on a flat note.

The upcoming week marks some major economic numbers and events which shall impact the risk sentiments in both global and domestic markets. The much hyped debate on FDI in multi brand retail in parliament and the voting on the bill if passes through then shall induce sharp gains in INR making a complete turnaround for the pair. The NFP and other employment and PMI numbers from US and other developed economies shall dominate the headlines leading to quiet trading activity ahead of their releases.

For the week importers can create a partial hedge around the Rs 54.00 – Rs 53.50 levels for their payments and exporters can use the weakness towards Rs 55.00 – Rs 55.50 levels to initiate short hedge with a stop loss above Rs 56.10 levels as to cover their receipts. The crucial levels for INR appreciation are Rs 53.80 levels and for depreciation the Rs 55.40 levels can be closely watched as rise above Rs 55.40 levels shall weaken the pair till Rs 55.90 levels.

Crude oil prices remained within the range of $90 - $85 levels for the week supported by the risk on sentiments in global markets and weaker tone of dollar index. The sharp rise in equity markets raised the demand prospects of the liquid gold and a decisive move above the 90 levels shall extend gains towards 93 levels. The draw in the weekly oil inventories also supported the prices which have been witnessing bargain hunting around the 85 levels.

Derivative Strategy: Deep out of money options strategy can be used for optimal gains. When the futures CMP is around Rs 55.50 – Rs 55.70 levels – Buy Rs 54.25 or Rs 54.00 Put options and when the futures price trades around Rs 54.00 levels – Buy Rs 55.00 – Rs 54.75 Call options.

Technical Take on USDINR
The trend line resistance above connecting the previous tops resisted the pair from making further advances and was sharply lower while ending the week on a weak note. The close below the rising trend line support within the sideways channel is a negative sign and can push the pair towards the trend line support of the sideways channel. We recommend selling USDINR futures on rise towards Rs 54.90 levels with a stop loss above Rs 55.50 levels targeting Rs 54.10 and Rs 53.90 levels for the week.