Euro zone Turns and US Twist (Operation Twist) moves the market

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This month started with markets seeing huge sell off across the asset class (from commodities to equities).Investors moved to safe havens and we saw safe havens like Dollar and Yen gain the most. Since the US dollar is by far the most important financing currency, it benefits most from increasing risk aversion. The yen plays a similar role. The Swiss franc on the other hand is out of the running since the Swiss central bank set a minimum exchange rate against the euro. However, Gold was hammered as the investors sold all holdings to cover losses in other market. Adding to the fall was rise in CME margin. Also, supporting dollar was the Operation Twist from Fed and Weaker Euro Fundamentals. Central Banks of all the developed countries continue to take actions to fight crisis.

In Euro zone, Greece continued to be in highlight. Euro fell as Greece failed to find solutions to its deficit. Greece has committed to undertake further austerity measures and to accelerate recent measures in order to secure that aid. The Greece deficit will fall to 6.8% of GDP above the 6.5% required by Troika to release the next tranche of Greece aid. As per recent CFTC data, Speculators slightly increased bets against the euro, with a net short position of 82,697 contracts. A week earlier, net euro shorts stood at 82,473 contracts.However, ECB has lend some support to Euro by announcing a series of liquidity provision measures, including LTROs, MROs and the most awaited covered bond purchases program. However, traders continue to be cautious as EU region still faces “downside risk” and as no concrete plan or actions have to be taken. Finally, some relief should be seen at upcoming G-20 Meeting. French President Nicolas Sarkozy, speaking at a joint

briefing with German Chancellor Angela Merkel, set a deadline to deliver a response that addresses Greece’s immediate difficulties and what he called the structural defects in the 17-nation euro area. He said European leaders would deliver a plan by the Group of 20 summit on Nov. 3.
Downgrades Continue:
Fitch kept Portugal at BBB- while it completes its review in the 4Q, potentially seeing a cut to junk status. Fitch noted that the downgrade reflects” intensification of the euro zone crisis”. Moody’s cut Italy’s rating by three notches from Aa2 to A2 with a negative outlook. Moody’s also placed Belgium’s Aa1 local and foreign currency-ratings under review for a possible downgrade. Improving US Data and Operation Twist helps Dollar Economic data from US have been showing positive signs in last fortnight. The U.S. economy created 103,000 net new jobs in September with the private sector creating 137,000 new jobs, a pretty decent indication that modest economic growth continued in the United States in September. The ISM

manufacturing and non-manufacturing indexes both signaled modest expansion in September as well, although August factory orders declined.
GBP Hampered by Additional Easing
Sterling has been under pressure as dollar strengthens against almost all currencies and on additional easing. The BOE surprised the market by increasing the bond purchase program by +75B pound to 275B pound in response to the dramatic deterioration in global economic outlook. The Bank rate was kept at 0.5%, though.
Asian Currencies
China’s Yuan advanced the most in 11months on speculation policy makers will tolerate gains after the U.S. said the Asian nation undervalues its currency. Chinese Yuan continues to be advancing among all the Asian currencies. China faces pressure to appreciate the currency as the U.S. is pushing for a stronger Yuan Japanese Yen continues to be supported by safe haven buying. Japan’s currency may climb within week as investors continue to purchase the currency as a refuge from the euro-area debt crisis. The BoJ maintained its 50 trillion yen ($650 billion) scheme to buy securities and boost liquidity to help shore up confidence amid worries over the strong yen and the health of the global economy. It also extended by six months a 1.0 trillion yen loan programme for financial institutions in areas affected by the March 11 earthquake, up to the end of April 2012, in a bid to support rebuilding efforts.
Indian Rupee continues to weaken as stronger dollar and huge current account deficit continues to weigh. Also, fall in equity market and outflow of foreign funds weigh on Indian Rupee. Foreign funds pulled out nearly Rs 2,000 crore from the Indian stock and debt market in September, the second consecutive month in which overseas capital outflows were greater than inflows. Overseas funds withdrew a net $2.4 billion from Indian stocks in August, the most since October 2008, the SEBI data showed. Outflow from equities this year is 23.5 billion rupees. Inflows from abroad surged to a record $29.4 billion in 2010.
Key Events to keep eye on:

    • Slovakia and Malta are the last two countries set to ratify the changes to the EFSF
    • FOMC minutes could shed light on Fed’s next move
    • EU Summit on Oct 17 and 18th
  • November 3rd G-20 Summit


Indian Rupee Spot Weekly Chart (10/15/2010-10/10/2011)


EUR/USD Spot Weekly Chart (10/15/2010-10/10/2011)


Currency TREND Supports Resistance
Strong Stronger Strongest Strong Stronger Strongest
 DXY  Mildly Bearish 77.55 77.00 76.00 78.10 78.57 79.60
 EUR/USD  Mildly Bullish 1.3286 1.3146 1.2975 1.3848 1.4104 1.4282
 USD/INR (SPOT)  Sideways to USD Bearish 48.66 48.38 47.74 49.27 49.89 50.10

Oct 2011

Source : Bullion Bulletin

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