EVENING REPORT-JAN 05

Rupee ends the day at 48.54 levels. Profit booking spree seems to have hit bonds . They have retreated from their six year lows early in the day following coordinated fiscal and monetary measures by policymakers to boost growth. Currency also has taken a breather from the early morning rally to trade at 48.72 against the dollar The non-deliverable forward dollar/rupee rates were off lows as traders bought the greenback noting its rise against major currencies. The economic docket will provide little event risk for the dollar today with only the second tier indicators vehicle sales and construction spending. The dollar’s overnight strength may continue today if investors subscribe to the argument that the U.S. economy will be the first to emerge from the current financial crisis. The New Year brings the fiscal stimulus plan proposed by President Barack Obama in sight .Details are starting to emerge regarding the aide package which includes $300 billion in tax breaks. Potentially 40% of the stimulus will include a $50 tax reduction for individuals and $1000 for couples. This proposal could help boost consumer demand which already gaining from the reduction in gasoline prices. However giving the dollar’s strong correlation to risk appetite the prospect of the increased consumer spending could lift equity markets which could weigh on the greenback. Euro fell almost 300 bps to 1.3656 as European trading started on comments from ECB Vice-President that deflation has become a concern for the central bank and further easing may be necessary to achieve price stability. These remarks were reinforced by Italian CPI dropping from 2.7% to 2.4% in December. Meanwhile Euro-Zone Sentix investor confidence reading unexpectedly rose to -34.4 from -42.3 on the back of interest rate reductions and fiscal stimulus packages from the various nations. The positive fundamental data helped slow the Euro’s decline as it has since consolidated above 1.3660. The central bank is clearly considering more easing which could come as soon as January 15th. Expectations that the region’s economy will continue to slow and the drop in prices will accelerate will leave the MPC will little choice but to continue their current easing cycle. Pound saw see-saw action during the overnight session as it fell over 100 bps after an earlier test of 1.4580 before retracing back above 1.4500. The recent bullish momentum would ignore the lowest construction PMI reading. The activity gauge dropped to 29.3 from 31.8, as the sector continues to be impacted by the worse housing crisis since the Great Depression. The failure of the sector to bottom has dragged on the economy. The BoE may be forced to continue its aggressive easing policy and is expected to reduce rates by another 50-100 bps on Thursday. The expected rate reduction may lead to the Sterling trading heavy leading up to the decision. Yen dropped over 100 points against the dollar as the prospect of the U.S. fiscal stimulus plan has led to a boost on risk appetite sending the Nikkei higher by 2%. The pair would reach as high as 93.40 before finding resistance. However, we may see weakness going into the U.S session as European markets have pared gains and U.S. futures are pointing to a lower open. Another dismal U.S. NFP report looms at the end of the weak which may curb bullish sentiment.