Equity markets continued their journey north with all major markets closing in the green for the week. The Sensex was up 100 points with indices worldwide crossing recent highs. Gold ended unchanged from last week at 1107. The European leaders seem to have a worked up an arrangement to help Greece ending the long stalemate between the leaders. The help from IMF might be necessary and unavoidable but does not bode well for the European Union. The US Dollar strengthened across the board rising against all major currencies. Supported by strong fundamentals inside and sovereign worries in other parts of the world the USD continues to stage a notable rally. On the contrary the USDINR seems to be much less affected by risk appetite in the global front. While the USD strengthened against almost all currencies it depreciated almost 30 paise over last week against the INR before closing at 45.23-24 levels. Strong fundamentals and high returns are driving capital inflows in the country could drive the USDINR further down however we see strong support at these levels and some importer demand might take the pair to 45.50 levels this week.


Market Developments
Global Outlook

• The US Dollar finished the week as the top-performing G10 currency, staging a rally against the Euro, Japanese Yen, and other key counterparts. The DJIA and S&P500 pushed out to fresh 16-month highs this week as the first quarter lurched towards its close. Fed Chairman Bernanke reiterated that the continued need for accommodative policies and economic slack warrants low rates for an “extended period.” The news was mixed for the US housing sector this week. US new home sales fell to their lowest level ever in February, while existing home sales data declined very slightly from January levels, in line with expectations. Another political storm brewing with the US Treasury likely labeling China as a currency manipulator in its next report. It remains to be seen what impact that will have on the Treasury yields which have gone up in the past week. Fourth quarter GDP came a touch lower at 5.6 % against expectations of 5.9 % nonetheless reinforcing the view that US is recovering much faster than expected.
• Uncertainty prevailed in the Euro-Zone with a somewhat workable package that includes the IMF being announced for Greece. Market reacted by a strong selling with the pair testing 1.3250 levels on Tuesday before staging a small recovery. The bail put plan for Greece is likely to work with support from IMF. However it remains to be seen how risk appetite pan out for the Euro. We all know that Greece is not the only country in the zone standing in line for aid. The bigger worries come from Spain, Portugal and Italy. Again we would continue to maintain our negative bias on the Euro until a strong resolution on the sovereign issues is reached. Rebounds in the Euro are likely to be met with sellers at 1.3500 levels and any further political unrest among the leaders or any news impacting risk appetite is likely to take the single pair downwards towards our 1.3000 levels.
• The British Pound was broadly in range and taking support at 1.4793 close to March low of 1.4782. While we continue to maintain a negative bias on the pair with upticks being sold, it might not slide rapidly in the near term. Comments from the Chancellor about declines in unemployment and increase in public may be true but with all other major indicators pointing downwards the UK economy is far fro being out of the woods. We continue with a negative bias on the currency with key support at 1.4783 after which 1.4400 levels should not be far away.
• The economic calendar is packed for United States in the week ahead. Personal income/spending and the core PCE price index on Monday while Tuesday brings consumer confidence. ADP employment report, Chicago PMI and factory orders on Wednesday. Thursday being the important with initial jobless claims, ISM manufacturing, construction spending and vehicle sales while the nonfarm payrolls rounds off the look weekend on Friday. Eurozone has the business climate indicator, consumer confidence and German consumer prices coming out on Monday. French gross domestic product (Tuesday). The UK calendar is on the light side. For UK Consumer credit and mortgage approvals on Monday and the final cut of 4Q GDP on Tuesday with PMI manufacturing closing the week on Thursday. In other regions Japan is up for employment, industrial production, small business confidence, housing starts and the Tankan business indices on Tuesday.

Domestic Outlook

• Capital inflows due to high yields and a strong view on an appreciating INR in 2010-11 saw the pair being volatile during the week. After consolidating for the first two around the 45.60 levels the pair saw a false break out of the 45.60 levels to open at 45.70 levels on Thursday on the backdrop of risk sentiments in the Euro zone. However the upside momentum did not last much with the pair dropping nearly 50 paise in 2 trading sessions. SENSEX gains and potential bond inflows were watched. RBI hikes also set the INR on a positive footing on rate differential plays.
• Equity market inflows continued to be robust despite patches profit-taking. Speculation that cap on infrastructure related corporate bond buying limits for FII will be raised also added to the sentiment for more inflows coming in the Indian shores. Overall the INR has been bolstered from these sentiments and could remained heavy, but support on further dips could come from two fronts firstly from importers month-end USD demand, and secondly from any episodes of risk aversion that could prompt broad-based back-flow into the USD assets. We expect that the USD INR to trade between 45.10-45.60 in the coming week.

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