INR snaps 5-week fall despite strong USD; FII flows continue to be robust :: Edelweiss

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The week that was...

• The Indian Rupee closed at a two-week high on Friday, enabling it to break a five-week fall, driven by strong FII interest in domestic equity and debt (~US$40bn YTD). The Indian currency was supported by dovish RBI policy statement, coupled with status quo in monetary policy by ECB and BOE. The rupee was also seen positive ahead of the important US NFP data on Friday
• The local unit bucked the broader trend in Asia by gaining 0.4 percent on the week. Strong FII inflows into domestic debt and stocks kept the 10-year benchmark below the Repo Rate . The RBI is likely to prevent any sharp fall in the rupee, while foreign capital inflows should also cushion any potential blows from the overseas markets
• The US Dollar Index recorded its largest weekly gain in five weeks on Friday after a blockbuster nonfarm payrolls number for November showed that the US economic recovery is better than economists’ estimates. The November NFP is one of the biggest monthly gains in last three years, while the unemployment rate is at 5.8% - well below the Fed target of 6%. This strong NFP number will help US central bank to take a call on increasing rates sooner than expected. The US economy added 321,000 jobs in November. Reading from September and October were revised upwards by 44,000 combined

Currency Outlook for This Week

• For the week, the rupee is likely to trade with a negative bias, as strong US NFP data, coupled with weak Euro, Yen and Pound will keep Asian and EM currencies under some bit of pressure. The rupee is likely to trade in a narrow range overall, as strong capital flows into domestic debt and equity will keep it in better position versus US dollar vis-à-vis other EM peers amid mounting expectation of an early rate hike by the Fed
• Strong trend in domestic equities, improvement in domestic macro-economic fundamentals and stable FII flows (US$40 bn 2014 YTD) will keep the rupee’s fall limited