Risk Currencies Unchanged After Chinese Data

The rupee ended 4 paisa lower on Wednesday at 52.96 per dollar. The dollar gained after initial losses despite gains in the euro-dollar pair on increased demand from nationalized banks on behalf of oil importing companies and defense related payments. Some amount of caution was expected which increased demand for dollars to certain extent. However, a rally in the eeuro made sure that losses in the rupee were restricted.

China’s 3Q GDP came in line with expectation of 7.4% while Retail Sales and Industrial Production rose more than forecast at 20.5% & 9.2% year over year. Overall the Chinese economy slowed down in 3Q amid signs of slight pickup in economic activity in September. Meanwhile china’s stock rose after Premier Wen Jiabao said the economy has started to stabilize. Asian equities are trading higher. Currencies, on the other hand, are trading lackluster with Australian dollar largely unchanged after Chinese GDP data.

US Housing starts jumped 15% to 4-year high offering further evidence that housing sector is recovering. Building Permits rose 45.1 percent since September 2011, the biggest annual jump since 1983. A strong housing data on continual basis also means that Fed will consider reducing the size of QE3 which is dollar supportive.

USD/INR is likely to open flat given that risk currencies are trading unchanged after china data. On the other hand Strong US Housing data will add to dollar’s strength. We expect the pair to continue trading in 52.60 to 53.15 range as focus now shifts to 2-day EU Summit which begins today.

EUR/USD: The euro remained strong against the dollar during Asian and European session after Moody's refrained from downgrading Spain. As expected, Spanish and Italian yields opened lower with Spanish 10-year yields falling to its lowest since May 2012 while Italian 2-year note yield falling to its lowest since March 2012.

Markets have been considering higher yields post the S&P downgrade of Spain as sign of bailout leading to a rally in EUR/USD from 1.2830 to 1.31. Within a week’s time, markets witnessed two of the “big three” rating agencies update their outlook on Spain. Rating agency Fitch’s outlook on Spain is due in coming days.

If Fitch, like Moody's maintains status quo on its outlook on Spain, EUR/USD will fall to 1.2830 levels as Spanish and Italian yields will fall further. As of today the pair will trade in a range of 1.3150 to 1.3060. Not much is expected out of the EU summit.

GBP/USD: The GBP/USD climbed above 1.6150 levels after UK Unemployment rate fell to 7.9% its lowest level in 15 months. Better than expected jobs data reduced the chances of BOE embarking on fresh round of QE in its November policy meet. Furthermore, the recent fuel price hike in UK is expected to show up in next month’s inflation number thereby creating skepticism over QE.

The pound strengthened further tracking the rise in EUR/USD pair. With this, the outlook for the pound turns bullish against the euro. A strong US housing data will limit strength in pound to some extent. However, we do not expect the pair to fall below 1.61 levels today.

USD/JPY: USD/JPY is trading higher in early Asian trade supported by better than expected US housing data. The pair has immediate resistance of 79.22 while support comes around 78.80. Positive outcome of EU summit will most likely take pair higher towards 80 levels. Till then the pair is expected to remain range bound.