Currencies Flat Ahead Of US Homes Sales Data

USD/INR rose above 55 level on Friday on concerns of deteriorating macro economic concerns in India and abroad. The failure of 2G Auction has stoked worries over fiscal situation. WPI data though better than expected is still not sufficiently lower according to RBI. The BOP status continued to worsen in October as deficit increased to record high of $21 billion.

Trade deficit figures create risks that the current account deficit in India will come in around $60 billion in fiscal year 2012-13. The situation in US and euro is further putting pressure on INR. Going forward, markets will be focused on the winter parliamentary session which begins on coming Thursday.

With various political groups threatening to raise the Foreign Direct Investment (FDI) issue in Parliament, the Winter Session is expected to be a stormy one. On global front, developments over Fiscal Cliff will continue to affect market sentiment. USDINR is expected to trade in a range of 54.90 to 55.40 today.

EUR/USD: The EUR/USD lost its momentum today with the euro slipping to end the past week at 1.2740. EUR has failed to make significant gains above 1.2800 this week, and further declines are expected as we approach key events starting Tuesday. The euro group will be meeting on November 20th to discuss the extension of fiscal targets for Greece, and IMF Managing Director Christine Lagarde is set to attend.

The IMF opposes the relaxation of Greek fiscal targets to 2022 from 2020. It has been rumored that Spain is exploring the idea of applying for an IMF aid package, one that may carry less onerous terms than what is currently being asked by the euro group. However, an IMF package would not allow for Spain to benefit from the ECB’s OMT and is thus not likely to be pursued. EUR/USD pair will follow Spanish bond Yields closely which are hovering around 5.8 levels recently. Pair is expected to trade in range of 1.2804 to 1.2690 today.

GBP/USD: The GBP/USD ended past week at 1.5891 swinging between small gains and losses. The near-term outlook for QE from the BOE has been moderated, providing support to GBP despite weakened employment and retail sales data. This week’s BOE minutes release is likely to confirm the ‘do-nothing’ bias of the MPC, but may provide some clarity with regards to the voting pattern. The outlook for growth in the UK remains weak, suggesting a need for accommodation; however the persistence of above-target inflation will limit the ability of policymakers to act. GBP/USD will track movements in EUR/USD pair.

USD/JPY: USD/JPY jumped more than 150 pips in two trading sessions of last week as political pressure in Japan started to build. The fundamental picture in Japan is deteriorating, we are concerned that this pair won't be able to see sustained upside unless US Treasury yields start to move higher.

US Treasury Yields have fallen in last week as fiscal cliff negotiations have begun. Further, recovery in US has been slowed down by Super storm Sandy as evident from the last week’s Jobless Claims, New York manufacturing surveys and industrial production for last month. This has created speculations of extension/addition to Fed’s QE3 which further keeps Yields low.

On the other hand, BOJ meet is due this week. We doubt it will do more QE because it rarely increases QE at back to back meetings, also it would look like an admission of failure that they didn't do enough QE at their meeting last month. This is a risk to USD/JPY bulls; if the BOJ remains on hold next week then we could see some reversal in JPY weakness in the short-term.