Poor News Data Leaves Euro & Dollar A Little Flat

The Euro and US Dollar were left a little flat on Tuesday after poor data out of both regions raised fears that the US and Euro central banks may need to intervene.
As a result, the Japanese Yen went on to be the top performer while other competing currencies continued to suffer.
A report released yesterday has shown that U.S. manufacturing activity has contracted for the first time in nearly three years. This fanned investor scepticism that crept in about hopes for the European Union's plan to support debt laden countries.
The European Central Bank (ECB) may well cut interest rates by 25 basis points to 0.75% at its policy meeting on Thursday, after data showed that the jobless rate in the Euro zone had risen to a record high in May, while factory activity remained steady at its lowest level in three years.
Yesterday both Finland and the Netherlands said that they were opposed to a plan for the Euro zone's permanent bailout fund to purchase government bonds in the secondary market, further pressuring the Euro.
The main issue now, is that the plan can't proceed if members don't agree and many analysts see this as a sign that there might be more bad news ahead for the Euro.
The announcement of the plan on Friday had sent the Euro soaring about 1.7%, its biggest one-day percentage gain since last October.
Activity though has been relatively thin ahead of the Fourth of July U.S. holiday. Some analysts expect the Federal Reserve to announce that it will embark on a third round of asset purchases, known as QE3. This could occur as soon as the central bank's next policy meeting scheduled from 31st July to 1st August.
Today, market focus will be on the U.S. Commerce Department which is due to release .U.S. factory orders data today. Orders are expected to have risen around 0.1% in May, from a 0.6% drop the previous month.
The Dollar has managed to outperform the Euro which had slipped to $1.2595.
The Yen outperformed most of its major counterparts and the greenback was off from Monday's high around 79.98 Yen at 79.72 Yen, while the Euro stood at 100.42 Yen, back above the 100 Yen mark.

Euro zone leaders take steps to solve crisis.

The Euro dipped slightly today after Friday's rally and the market's focus now shifts today to latest data on European and U.S. manufacturing sectors

The Euro dipped earlier today, as investors searched for new reasons to extend a rally initiated by euphoria concerning the latest European leader's push to solve the region's debt crisis.

On Friday, the Euro zone leaders had agreed to have their rescue fund provide aid directly to stricken banks from 2013 and also to intervene on bond markets in order to support troubled members.
The EU leaders went even further towards banking union, when they pledged to create a single banking supervisor.

The agreement then triggered a rally in Italian and Spanish government bonds and the Euro shot up nearly 1.7% on the day, its largest one day percentage gain in eight months.

While many analysts expect that the Euro's rally may be sustained for a while longer, many others doubt its sustainability. Some have cautioned against reading too much into the Euro zone bond market's reaction on Friday and expect some of the gains to be given back.

Over the course of the month, one could expect to see the Euro run into resistance from weak economic data and move down as officials haggle over the details of the EMU summit.

A near term risk for the Euro, is the European Central Bank's interest rate decision which is due this Thursday. There is an expectation that the ECB may cut interest rates by 25 basis points to 0.75% and a rate cut will almost certainly be Euro negative.

Data is due out today that may show that the Euro bloc's jobless rate has climbed to a record figure, expected to be in the vicinity of 11.1% in May from 11% in April, and that manufacturing figures are down.

The Euro slid 0.3% to $1.2625 earlier today and had slipped 0.3% to 100.72 Yen, having jumped 2.2% versus the Yen in its biggest one day rise against the Yen in 15 Months on Friday, as there was some profit taking by hedge funds.

The market's focus now turns to the latest data on European and U.S. manufacturing sectors. China had announced yesterday that its factory activity had slowed to seven month lows in June however, this figure was not as low as initially feared.

Eurozone debt crisis continues to bite.

Eurozone unemployment rose in May to hit another record of 11.1%, up from April's 11%. As usual, the figures were very ugly in the South, with Spain's rate 24.6% and Greece's 21.9%. Meanwhile, final Eurozone Manufacturing PMI came in at 45.1 in June, rounding off the weakest quarter in three years. Germany and France were among those to suffer contraction, with only Ireland and Austria enjoying growth.

India's external trade balance has worsened to record lows.

 In March quarter, the current account deficit (CAD) stood at 4.5% of the Gross Domestic Product (GDP). For the full year, the same stood at 4.3%. Declining exports due to slowdown in global economy and strong crude oil demand has negatively impacted the CAD. And this has impacted the rupee negatively. It may be noted that the rupee has depreciated by 25% over the last one year. In fact, it touched a record low of 57-58 a dollar recently. While RBI has taken a few steps like easing the external borrowing norms for companies it remains to be seen whether it will have a meaningful impact in curbing the rupee's fall. We believe the best way to do the same is to take steps that shall narrow the trade deficit. Making exports competitive by providing tax sops to exporters is one such step. Policy reforms attract FII/FDI flow into the country. Even that would provide some respite to the falling rupee. Further, falling crude prices also act as a blessing in disguise.

One of the most visible signs of a strong economy is a stable currency. The slide of the Rupee against the dollar is continuing unabated. The rupee posted its biggest daily gain in three years on Friday, after Indian government confirmed it will not impose retroactive taxes on foreign investors. But, this still did not prevent the Indian currency from posting its worst quarterly performance in at least 17 years. The reasons for this downfall are many. India's large current account deficit. Eurozone's escalating sovereign debt crisis. Dollar outflows from Indian stock markets (BSE-Sensex lost 25% in 2011). India's deteriorating macro-economic conditions. The country's new taxation rules and reopening of old cases. To reverse this trend, India needs to put some key strategies so that the demand for Indian Rupee increases in the forex market.


 

The RBI has raised the red flag on the current state of the Indian Economy.

 Almost every number that seems to be announced on the state of the economy lately is bleeding red. And it is only getting worse. Data released by the Reserve Bank of India (RBI) yesterday showed the current state of the Indian economy. And it is not a pretty sight. India's trade position with the rest of the world deteriorated in the March quarter to its worst level in 20 years. The current account deficit (CAD), which is the excess of imports over exports, rose to a dangerous level of 4.5% of the gross domestic product (GDP), from a benign level of 1.3% only a year earlier. For the full fiscal, the CAD stood at 4.2% of GDP, crossing projections of 4%. In FY11, the same stood at 2.7% of the gross domestic product. It has been almost 2 decades since the balance of payments crisis of 1991 where the Indian government was on a brink of default. But, even then these numbers were not so dismal.
A high CAD is a clear indication that a country is living beyond its means and can only fund its consumption with excessive external borrowings. A prime example is the US government, which continues to run a multi-billion dollar deficit till today. The scary part is that India seems to be treading a similar destructive path. India currently has the highest debt to GDP ratio of all the BRIC nations. This currently stands at 68% of GDP, compared to only 25.8% in China.

India also seems to be more vulnerable to external shocks, since its forex reserves have been drawn down and its stock of external debt has increased. Plus, growth in the country has slowed and India is facing pressures of sovereign credit rating downgrades. Now with its report on the state of affairs of the economy, the RBI has raised the red flag, confirming the rating agencies' concerns. But, can the government rise to the challenge? Or will it raise the white flag of surrender?

More clarity required on GAAR.

The Union Budget for the year had proposed several measures to try and increase foreign investors to invest in India. But it also proposed one big thing that scared FIIs (Foreign Institutional Investors). This proposal was that of GAAR or General Anti Avoidance Rule. The Rule was proposed with the intention of preventing investors from routing money through the tax havens to avoid payment of taxes. Naturally like any individual, FIIs were also unhappy at the prospect of paying more tax. Fortunately like most other ambiguous rules and proposals, GAAR too was deferred to another date. But in a new development the Finance Ministry has proposed a monetary limit on invoking GAAR. Though the ministry has not disclosed the amount of this limit, it has proposed the same in its draft guidelines for GAAR. So all deals over this limit would fall under the purview of GAAR. Also this would be applicable only on those FIIs who choose to take the benefit of double tax avoidance treaties. As such the statement in itself is neither good nor bad. Unless there is more clarity on how GAAR would be invoked there would be no point in reacting to the same. More importantly till there is more clarity on when GAAR would be invoked again there would be no point in reacting to the same.