Evening Report-May 07

The Rupee closed at 49.23 per dollar tracking firm domestic shares, which raised hopes for fresh capital inflows and bouyed by rise in other Asian units. The dollar was initially trading higher against the euro and pound with the pending BoE and ECB rate decision, has since come under pressure as higher equity markets in Asia and Europe continue to fuel risk appetite. However that sentiment could change if the U.S. government’s bank's stress test result reveal that more banks need to raise capital than the early rumors have dictated which could reverse recent optimism and lead to dollar support. It has been leaked that Goldman Sachs, Wells Fargo and JP Morgan are adequately capitalized while Bank of America and Citigroup will most likely raise capital through issuing common shares Although, price action will be dictated by the European policy makers and the bank stress test results, today’s initial jobless claims release also has the potential to be market moving. The employment figures come on the heels of yesterday’s ADP report which showed that the labor picture is improving. Markets will be looking to see if the number of claims supports the brighter outlook ahead of tomorrow’s NFP report. Euro has started to find support after falling to as low as 1.3251 against the dollar as speculation has started to increase that the ECB may not cut rates which was supported by March German factory orders unexpectedly gaining 3.3%. It was the first positive reading in activity for the regions largest economy in seven months which helped push the euro/dollar to as high as 1.344. The most encouraging component was that an increase in foreign demand was led by a 6.1% increase from Euro-zone members adding to signs that the recession may be slowing.The ECB is expected to cut rates by 25 bps to a record low 1.00% today, which the committee may set as a floor for monetary policy as several members have expressed reluctance to go below. If this is the case we could see the euro find support if the action isn’t coordinated with quantitative easing measures. The central bank has been reluctant to follow the BoE and Fed in purchasing government debt as the strategy is more difficult to execute with an economy consisting of 16 countries and their various debt instruments. Recent improvements in the German IFO and Euro-zone PMI reading could lead the central bank to keep rates on hold as they chose to maintain their measured approach. Considering the current division amongst them, there may not be the necessary votes to make a policy change.Pound has seen choppy price action ahead of today’s BoE rate decision, where the central bank is expected to keep their benchmark rate at 0.50%. The MPC doesn’t have much room to maneuver and will most likely keep rate sat their current record low for the time being. However, the central bank may add to their quantitative easing efforts which have started to impact credit market as we have seen Libor rates fell below 1% for the first time. At the last policy meeting Governor King stated that it would take at least two months for the central bank to finish their initial government bind purchasing program which could make today’s rate decision a non-event. The committee will most likely not provide a statement if they keep rate sin hold and refrain from initiating more non-traditional efforts.