Edelweiss, INR remains under pressure as FIIs sell local shares; USD strength persists

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The week that was...

• The Rupee lost more than 1.5% last week against the US dollar, mainly driven by weakness in EM currencies, and escalating worries over Russian economy, especially a sharp fall in the Ruble (which touched almost 80 mark vs USD driven by continued drop in crude oil basket). The Indian currency touched a low of 63.88 in spot trades, falling to a 10-month low but RBI intervention and exporters’ sales limited the weekly loss. WPI based inflation dropped to zero in November from 1.77 per cent in October and 7.52 per cent in November 2013. The inflation readings should prompt the RBI to cut the key interest rates in the next few months. Trade deficit figures released during the week showed an 18-month high reading for November 2014 to $16.86 billion
• In global markets, the Euro weakened towards the end of the week after reports that ECB officials were discussing details of a possible QE and mulling ways to ensure that weaker peripheral economies gain substantially from the potential ECB action. Separately, the Swiss National Bank said that it would impose an interest rate of -0.25% on some large deposits held by investors in francs, so as to discourage the buying of swiss franc as a safe haven asset
• US dollar index ended the week at its highest level since March 2006 and surpassed the 89 mark, as investors pushed the greenback higher against major global currencies after the FED hinted in its latest monetary policy statement that the US central bank would begin raising rates around the middle of 2015 and that it will be patient in hiking rates

Currency Outlook for This Week

• Indian Rupee for the week will track movement in global equity and currency markets amid worries about world economic recovery. Overall, the trend will be sideways ahead of Christmas holidays and will keep the market sentiment range bound. Markets for the week will also be influenced by FII flows which have tapered off over the last one week due to the global risk-off sentiment
• USDINR spot is likely to trade in a narrow range. On daily chart, it has made an exhaustion gap on strong rally with high volumes. If USDINR spot fails to break the resistance of 63.88 made last week, a strong pullback can be seen in coming weeks in USDINR futures and spot markets