Both Humpty and Dumpty (Federal Reserve and ECB) did as expected, disappointing the markets on easing front. The FOMC was the first to throw up its hands on its QE programme citing modest recovery in the Job and Housing markets as it felt that the markets doesn’t need the liquidity dose at this juncture.

The ECB’s move was closely watched as it is where the current global economic problem is emanating from. The responsibility to address or repair the problem also lies on the ECB only. Germany played the spoil sport by restricting the ECB’s move to grant a banking licence to the ESM and also opposed to the ECB’s bond buying programme openly.

Actually it also makes sense as there is no point in bailing out those who cannot or even try to fix or restrict their fiscal deficits. But the problem is that if a low-cost capital mechanism is not provided then these debt-ridden economies will bleed to death which is a dangerous situation to the single currency itself.

Germany that is writing cheques for such beleaguered nations does not want to drain its tax payer’s money.

The possible solution to this precarious situation should come from Germany itself as the markets are losing confidence in the comments or verbal assurances of ECB.

Global currencies hit their weekly lows after Humpty Dumpty disappointed the streets triggering a fresh wave of risk aversion which pushed the global markets lower. However stronger than expected economic numbers from the US and mild recovery in Chinese PMI numbers supported global optimism.

But it will be difficult to sustain such gains as the EU debt problem is just the tip of the iceberg. We will not get into that as we feel that this not the right time to address that. The INR as expected made a low of around the 56.50 levels. successive closes above the same shall target the next level of around 58.00 probably towards the end of August or by mid September.

The Indian markets faced disappointment on the local front but the ECB’s short-term dated bond buying programme to keep short-term capital costs lower made global markets regain confidence in ECB.

The ECB has bought time as of now and that shall tide for some time till another fresh issue emanates from the EU.

The sharp rise in global markets and strengthening of emerging market currencies supported pencil sharp gains in INR but once the ECB effect fades away we expect the INR to be pressured lower on stagflationary concerns and a drought like situation in India.

A weaker than the previous quarter GDP numbers shall trigger sharp weakness in INR also exerting pressure on policy makers for stronger action.

The INR will oscillate between the 54–56range till the time the GDP numbers are out and a rise above 56.40 levels shall target 57and finally towards 58 levels.

Till then the 55.30 levels shall be construed as near-term supports followed by the 54.60 levels.

A dip towards 54levels shall be an ideal buying zone if it happens to come before the GDP numbers are out.

A strong policy action by the Government is the only threat to the above mentioned view else even against the backdrop of positive global news, the INR is expected to continue its weakening spree towards the 58levels as soon as it moves beyond 56.40-57 levels.

(The author is CEO, Alpari Financial Services (India). The views are personal)

(This article was published on August 4, 2012)
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