FICC TIMES //

THE WEEK GONE BY AND THE WEEK AHEAD

08 Feb 2013

Risk on sentiment got a sharp reversal when ECB President last week commented about a very late-in-year Euro recovery hope and also talked the Euro down. USD recovered sharply against most currencies, including Asians, and we expect that trend to continue in the next few days. Indian GDP growth expectation at 5% saw many luminaries comment in denial but there is no denying the fact that growth remains sluggish and it is hard to extricate ourselves from this position in the short term.

The various statements emanating from political and economic leaders set the tune for global markets this week. The ECB president kept key rates unchanged at the governing council meet this week keeping the overall policy stance as accommodative in view of inflation remaining within the ECB target and expected a recovery in Euro economy in the second half of 2013. He also hinted at further rate cuts to aid recovery, if needed. The ECB presidents concerns about strengthening euro as a key risk to the Euro area recovery led to the euro hitting a twoweek low after touching a 15-month high in the previous week. The Japanese Yen, on the other hand, reversed its trajectory and pulled back to 92.1 after touching a low of 94.05 earlier this week against the dollar after the Finance Minister said that the yens drop had been overdone. In China, The Peoples Banks of China (PBOC) in its fourth quarterly monetary report, cautioned against inflationary pressures going forward and stated controlling inflation as a priority. European markets and Asian markets, ex Japan, fell after the ECB statement. The US markets, however, closed higher after positive trade data from China and US. Closer home, lower growth forecasts from the IMF and CSO spooked the markets. The INR closed at a four week low and the stock markets trended lower despite record foreign flows so far this year.

The key events of last week:

Chinese trade data released this week reported strong growth in both exports and imports. Exports grew 25 percent while imports grew by 28.8 percent with a trade surplus of US$ 29 bn. One reason for the strong numbers is more working days this year in January vis--vis last year due to Lunar New Year holidays falling in January in 2012. But even on adjusted basis, the numbers are better than expectations, bolstering confidence about recovery in the Chinese economy Chinas CPI index rose 2 percent in January as against 2.5 percent in December, in line with expectations Japanese annual current account surplus for 2012, at 4.7 bn yen dropped by more than 50 percent. The current account ran into a deficit for the second consecutive month in December reporting a deficit of 264.1 bn yen as against 222.4 bn yen in November

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THE WEEK GONE BY AND THE WEEK AHEAD.

US jobless claims fell to a seasonally adjusted 366,000 with the jobless rate at 7.9%. The four-week moving average fell to 350,500, the lowest level since March 2008. This shows that while lay-offs have reduced, new jobs creation has still not picked up. US non-farm productivity fell 2 percent for the quarter and labor cost rose 4.5 percent for the quarter The Euro zone composite PMI for January came in at 48.6 as against 47.2 in December, indicating a slight recovery although the index remains in the contraction zone. US trade deficit in December narrowed to US$ 38.5 bn, on the back of a drop in oil imports. Exports increased by 8.6 bn to US$ 186.4 bn while imports dropped by 6.2 bn to US$ 224.9 bn. The overall trade deficit for 2012 was lower at US$ 540.4 bn as against US$ 559.9 bn in 2011.

And closer home....

The IMF report on India projects 2012-13 GDP growth at 5.4 percent and 2013-14 growth at 2013-14. The CAD has been projected at 3.9 percent of GDP, aided by falling gold imports, a weaker rupee and broadly stable oil prices The IMF report also highlighted that Indias slowdown is driven more by domestic structural constraints than external factors. It says while manageable, Indias CAD and rising dependence on debt finance amplify potential damage from a renewed bout of global financial turmoil or insufficient fiscal consolidation. It also raised concerns about weakening balance sheet of the banking sector The Central Statistical Office (CSO) forecast a GDP growth of 5 percent in 2012-13, much below the RBI and Ministry of Finance forecasts of 5.5 percent and 5.7 percent respectively The government raised Rs. 114 bn through the NTPC offer for sale (OFS), taking its divestment proceedings this year to 204 bn. With three more offers lined up in the coming weeks the government is confident of meeting its divestment target of Rs. 300 bn for the fiscal.

The INR ended the week at a four-week low on the back of lower GDP projections from the IMF and CSO. The Indian stock markets too remained weak throughout the week and ended negative

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THE WEEK GONE BY AND THE WEEK AHEAD.

So what does the next week hold...?

The positive trade and jobs data points to a slow recovery in the US. As economies in Europe and Asia recover, US is banking on its exports to pick up aided by a weakening dollar. The pull back in the yen seems temporary as a weak currency is imperative to Prime Minster Abes plans to bring the economy back on growth path. In Europe, although level of economic activity seems to be stabilizing, the economies are still contracting and recovery seems far off as structural issues of financial deleveraging and sovereign debt crisis remain, more so with the fresh political turmoil in the region. Closer home, the worries about taming the twin deficits re-emerge after lower growth forecasts from IMF and CSO. The markets are now increasingly focused on the direction to be laid out in the upcoming budget for bringing the deficits under control. The key events to look out for in the coming week are the BOJ announcement in Japan and locally, the IIP and inflation data.

Important upcoming International events to be tracked:

Date
12-Feb-2013 13-Feb-2013 13-Feb-2013 13-Feb-2013 13-Feb-2013 13-Feb-2013 13-Feb-2013 14-Feb-2013 14-Feb-2013 14-Feb-2013 15-Feb-2013 15-Feb-2013

Country UK US Japan Japan Japan Japan EMU Japan India US EMU US

Event CPI Treasury Budget (Treasury Budget - Level) Tertiary Index (Month over Month) Bank of Japan Announcement Bank of Japan Announcement (Change) Bank of Japan Announcement (Level) Industrial Production GDP (Quarter over Quarter) WPI Inflation (YoY Chg) New Series (Base 2004-05) Jobless Claims Merchandise Trade Industrial Production

Period Jan, 2013 Jan, 2013 Dec, 2012 Feb, 2013 Feb, 2013 Feb, 2013 Dec, 2012 Q4, 2012 Jan wk2/9, 2013 Dec, 2012 Jan, 2013

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Important upcoming Domestic Events

Date 11-Feb-2013 11-Feb-2013 12-Feb-2013 12-Feb-2013 12-Feb-2013 12-Feb-2013 13-Feb-2013 13-Feb-2013 13-Feb-2013 14-Feb-2013 15-Feb-2013 15-Feb-2013 15-Feb-2013 Event Foreign merchandise trade Exports (YoY Chg) Foreign merchandise trade Imports (YoY Chg) CPI Inflation - Rural (YoY Chg) CPI Inflation - Urban (YoY Chg) CPI Inflation - Combined (YoY Chg) IIP (YoY Chg) 91 day T- Bills auction of Rs 50 bln (cut-off yld) Reserve Money (change on wk) 182 days T- Bills auction of Rs 50 bln (cut-off yld) WPI Inflation (YoY Chg) New Series (Base 2004-05) WMA (ways and means advance) - to central govt WMA (ways and means advance) - to state govts FX reserve (change on wk) Period Jan Jan Jan Jan Jan Dec Wk to Feb 8 Jan Wk to Feb 8 Wk to Feb 8 Wk to Feb 8 Freque Month Month Month Month Month Month Weekly Weekly Fortnig Month Weekly Weekly Weekly

Technical Based View:

> USD INR saw a low of 52.87 in the recent fall from 55, but bounced back sharply to 53.55 last week driven by profit taking > The daily momentum indicators are slowly turning up, pointing to further short term gains in USD/INR > We expect the medium term direction to remain DOWN, however near term upmove may take USD/INR all the way up to 54-54.40 > For now, we will like to remain on sidelines, waiting to short USD/INR around the 54 mark with a stop at daily close above 54.40 We expect USD/INR to open up at 53.73-78 range on Monday triggered by continued weakness in Euro post ECB meeting last week. Technically, short term oscillators are moving up pointing to further weakness in the rupee. While the fundamentals have improved, USD 4 bn inflows have been registered in the month of January alone and stock sales have gone well, the immediate triggers for rupee strength appear waning for now. Coupled with all-round USD strength and a rising USD/ASIA backdrop, USD/INR may well see 54.54.10 soon.

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THE WEEK GONE BY AND THE WEEK AHEAD.

Daily USD/INR Chart: Reuters

We will like to remain on the sidelines for now as we suspect some more rupee weakness before the medium term rupee strengthening trend picks up again. Short at 54-54.10 with a astop at 54.40 day's close stop.

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