January 02, 2012Visit us at www.sharekhan.com

Euro holdings at three-year low level—IMF

“The dollar right now is the only game in town. The euro,

which looked like an alternative, is under so much stress

right now nobody in the market is considering it a viable

reserve choice for the time being.”

Boris Schlossberg, director of research at online currencytrader GFT Forex in New York

“It was a bad year for the rupee and the first half of 2012

could be tough as well. The problems in Europe are likely to

persist.”

Roy Paul, Deputy general manager of treasury at Federal BankLtd. in Mumbai

Currencies—The US Dollar Index slides on last trading

day of 2011

• The US Dollar Index slides on last trading day of 2011

• Dollar Share of Currency Reserves Climbs, Euro at Three-Year Low

• Ringgit Has First Annual Decline Since 2008 as GrowthSlows

• India Current-Account Deficit Widens to Near Record onRupee

• Obama Will Delay Debt-Limit Increase Request, OfficialSays

• Euro Leaders Aim to Buy Time to Save Currency

• Lee Says ‘New Era’ With North Korea Possible

• Philippine Peso Up on Remittances Speculation

• Most Asian Stocks Fall

• Chinese Manufacturing Gauge Improves Even as EuropeDemand Slows: Economy

• China Export Orders Show Threat to Growth

• Commodities post first annual decline since 2008

• India to Allow Overseas Investors to Buy Stocks

• Sensex Drops as Earnings Concerns Counter Optimismon Foreign Fund Flows

• Ten Year Bond Yields Rise as Indian Government BoostsDebt Sales Target

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The US Dollar Index fell on the last trading day of 2011amid thin volumes. The US Dollar fell against the JPY, theGBP, the Australian Dollar, and Canadian Dollar, while thegreenback was unchanged vs. the Euro.

The US Dollar Index closed higher on the week vs. the GBP,the Euro, and fell against the JPY.

China’s manufacturing PMI in December unexpectedly roseto 50.3 from 49 in November, as per a report releasedyesterday. The reading exceeded all forecasts in a BloombergNews survey of 15 analysts where the median estimate was49.1. However, In the Chinese PMI data, an index of exportorders was at 48.6 from 45.6 in November, still below 50,the dividing line between contraction and expansion. Ameasure of output jumped to 53.4 from 50.9.

Asian markets are mostly lower despite China’s PMI datashowing unexpected expansion.

News out of South Korea is grim. The nation forecast thatits own overseas shipments would grow in 2012 at only abouta third of last year’s pace.

The rebound in the PMI “does not signal that the economyhas turned around,” said Zhang Zhiwei, a Hong Kong-basedeconomist at Nomura Holdings Inc. who previously workedfor the International Monetary Fund. “Growth momentumwill continue to wane this quarter, as the European crisiswill hurt China’s exports and a cooling property market willdrag down domestic demand.”

Rumors of China cutting its CRR this week are gainingcurrency, hence some caution is needed before one goesfor selling GBP/Euro aggressively against the US Dollar inshort-term. Besides spurring growth, policy makers maywant to ensure that there is enough cash in the systemahead of the holiday.

Bank of America Merrill Lynch estimates that the Chineseeconomy grew 8.7 percent in the three months throughDecember from a year earlier, the slowest pace since thesecond quarter of 2009.

Nomura estimates that China’s economy, the biggestcontributor to global growth, will expand 7.9 percent in 2012,the least in 13 years.

Currency WatchFor Private Circulation only January 02, 20122

sharekhan currency watch

On the domestic front, India’s government will allowoverseas individual investors to directly buy local equitiesas the country seeks to boost capital inflows and reducevolatility in the stock market. However, the Indian Rupeeis not showing any positive reactions this development.

Presently, liquidity is thin in the markets; hence movescould be exaggerated at times. Moves would make moresense after the first week as the traders return from theirholidays.

Most of the markets are closed today.

Downside in growth and commodities currencies is likelyto be limited ahead of the US non-farm payroll due thisFriday. Nonetheless, we continue to maintain bullish stanceon the US Dollar in general.

Asia Watch—India to Allow Overseas Investors to Buy

Stocks

The new rule from the central bank and stock marketregulator is expected to take effect by Jan. 15, thegovernment said in an e-mailed statement today. Currently,individual investors can only invest in Indian shares throughso-called participatory notes.

The move has been anticipated since October 2010 when aFinance Ministry official, who declined to be identified atthe time, said the change was being considered. R. Gopalan,secretary of economic affairs at the Finance Ministry,confirmed this on Nov. 15.

The new rule will “widen the class of investors, attractmore foreign funds, and reduce market volatility,” as wellas deepen the Indian capital market, the government saidin its statement.

Foreign investors pulled out $495.5 million from India’sequities last year, compared with a record inflow of $29.4billion in 2010, data from the exchange regulator show.

Ten Year Bond Yields Rise as Indian Government BoostsDebt Sales Target - India’s 10-year bonds declined, pushingyields to the highest level in almost a month, after thegovernment increased its debt sales target for the secondtime this fiscal year. The rupee weakened.

The finance ministry will expand its borrowing program forthe year ending March 31 by 400 billion rupees ($7.5 billion)to a record 5.1 trillion rupees, the central bank said in astatement after the financial markets closed on Dec. 30.Finance Minister Pranab Mukherjee is boosting offeringsto finance a budget deficit as the slowest economic growth(INQGGDPY) since 2009 reduces revenue.

India’s current account deficit near record - India’scurrent-account deficit widened to near a record last quarter,

the central bank said on Dec. 30, as a weakening rupeemade imports more expensive. The measure of trade andinvestment flows posted a $16.89 billion shortfall in thethree months ended in September. The median of nineestimates in a Bloomberg News survey was for a $17 billiongap.

The current-account deficit may widen further in comingmonths as the European crisis hurts demand for Indianexports, while a 15.8 percent plunge in the rupee last year,Asia’s worst-performing currency, boosts import prices in acountry that buys 80 percent of its fuel from overseas andincreases repayment costs for companies holding foreign-currency debt.

Europe Watch—Euro Leaders Aim to Buy Time to Save

Currency

Some 157 billion euros ($203 billion) in debt will mature inthe 17-member euro area in the first three months of 2012,according to UBS AG. By the end of that period, leadershave pledged to draft a stricter rulebook for controllinggovernment spending. German Chancellor Angela Merkel andFrench President Nicolas Sarkozy will meet in Berlin Jan. 9to work out details.

“The path to overcoming this won’t be without setbacks,but at the end of this path, Europe will emerge strongerfrom the crisis than before,” Merkel said in a New Year’sspeech broadcast Dec. 31. She said that her governmentwould do “everything” to bring the euro out of the slump.

Spain approves 8.9 billion euro austerity package - OnFriday in Spain PM Mariano Rajoy's incoming conservativegovernment presented an austerity package aimed atreducing the country's budget deficit. The measures includea temporary tax hike for high earners among others andfreezing of civil servants' salaries. The Spanish governmenthopes to reduce public spending by 8.9 billion euros.

These decisions were taken after it was estimated that thedeficit for 2011 would reach 8%, in comparison with theprevious forecast of 6%.

Hungary—New Central bank regulations package

In Hungary the parliament approved a new central bankregulations package, which significantly reduces the rightsof the institution's president. This move might compromisethe country's chance of obtaining bailout money from theIMF and the EU. Earlier last month talks about the loanhave been broken off upon the Hungarian PM Viktor Orban's presentation of the controversial bill, as both the IMFand the EU consider it a violation of the central bank'sindependence.

Currency WatchFor Private Circulation only January 02, 201233

US watch—Dollar Share of Currency Reserves Climbs,

Euro at Three-Year Low

The U.S. dollar’s share of global foreign-exchange reservesclimbed in the third quarter to the highest since late 2010,while holdings of euros declined to a three-year low,International Monetary Fund data show.

The U.S. currency’s portion rose to 61.7 percent in theperiod ended Sept. 30, the highest since the last threemonths of 2010, from 60.3 percent in the prior quarter,according to figures from the Washington-based IMFquarterly data. The share of euros fell to 25.7 percent, thelowest since the period of July through September in 2008.

The share of “other currencies,” which excludes reserveholdings of U.S. dollars, euros, British pounds, Japaneseyen and Swiss francs, decreased to 4.8 percent from 4.9percent in the previous quarter, IMF data showed.

The pound’s share fell to 3.9 percent from 4.1 percent,while the yen’s portion held at 3.8 percent, according tothe IMF data. Swiss francs also held, at 0.l percent. Theoverall level of reserves climbed 0.9 percent to a recordhigh of $10.18 trillion, the data showed.

The IMF calculated the dollar’s share based on data fromcentral banks that report their currency allocations. Somecountries, including China, the world’s largest reserveholder, don’t give currency breakdowns.

Market Watch—Euro Pares Losses as European Shares

Open Unchanged

The euro pared losses against the dollar and yen whileEuropean shares were little changed on the first trading

day of 2012 as the region’s crisis enters a new year.Emerging-market stocks slid, snapping two days of gains.Indexes of stocks and commodities had the worst yearlyreturns since the financial crisis in 2008. Data today mayconfirm European manufacturing shrank for a fifth straightmonth, as regional leaders return to work from theChristmas holidays seeking to buy time to rescue the singlecurrency from fragmentation.

INR-USD—Up 0.37%

The Indian Rupee (January contract) closed with a gain of19.50 Paise at 53.48. The domestic currency was down0.32% on the week.

Resistance is at Rs 53.77/ Rs 53.90. Support is at Rs 53.35.

INR-Euro—Steady

The pair was steady at 69.2075, while the Indian Rupeewas up 0.62% on the week.

Support is at Rs 69/ Rs 68.60. Resistance is at Rs 69.55.

INR-GBP— Steady

The pair was steady at Rs 82.575, however the domesticcurrency was up 1% on the week.

Support is at Rs 82.74. Resistance is at Rs 83.10/ Rs 83.23.

INR-JPY—Down 0.20%

The domestic currency closed with a loss of 14.25 Paise atRs 69.025. The weekly loss was 1.26%.

Support is at Rs 69.20. Resistance is at Rs 70.02.

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