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Dollar movement to be closely watched

Dollar movement to be closely watched
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First Published: Sun, Dec 06 2009. 09 21 PM IST

Updated: Sun, Dec 06 2009. 09 21 PM IST
The economic world was full of positive surprises last week. First the de-escalation of worries over Dubai after the size of the debt default was scaled down to $26 billion (Rs1.2 trillion), reaffirming the faith that the global economic recovery is real. This faith was strengthened by strong macroeconomic data across the US and Europe. The biggest of all was the monthly jobs report, which was far better than what the market had expected and it clearly signalled that now finally there are clear and strong signs of stabilization in the labour market. US employers cut 11,000 jobs in November, the smallest loss since the recession began in December 2007, and the unemployment rate also dipped, according to a US labour department report.
Consumer spending, consumer confidence and jobs data are the three most important indicators in the US in present circumstances, which are being watched most closely to assess the strength and pace of economic recovery.
Last week the macroeconomic story was quite interesting in Asia, besides which there were several surprising moves that bolstered investor confidence. The first such surprise came from the Bank of Japan, which called an emergency policy meeting in the face of government pressure to do more to beat deflation. It offered around 10 trillion yen (around Rs5 trillion) in three-month funds at 0.1% and kept its key interest rate steady at 0.1%. This was a big positive, and Japan, which had been seeing a downtrend in the equity markets for the last five weeks, was suddenly the hot spot among Asian markets as foreign investors found it least risky among major markets.
India was quite silent last week, though it closed around 2.82% higher over the previous week. The scepticism on Indian bourses was strange as it declared surprisingly good second-quarter gross domestic product (GDP) numbers, which showed the economy grew at its fastest in a year in the quarter, at 7.9%, far above forecasts of 6.3%. But the response of the stock market was not in sync, as analysts had apprehensions that this could be a one-off.
Even as investors were rejoicing over the credentials of the Indian economy, concerns over a rise in interest rates sooner rather overshadowed the euphoria. However, I think that given the fact that this quarter’s GDP could be affected by the monsoon, there will be pressure on government to keep pro-economic growth policies in place for some more time.
This week, the most important factor for global bourses is the movement in the dollar. The dollar’s sharp rally against a basket of currencies on Friday raises a lot of questions. The first and the most important: Is this the end of the weak trend in the dollar? This is a very relevant question despite everyone believing the dollar is likely to weaken further. If more signs of strong economic recovery are reflected in the US economy, it would pressure the Federal Reserve to raise interest rates, and this might impact the dollar carry trade, which is now a part of the huge liquidity on world bourses. Any sign of a slowing of dollar carry trade could spell doom despite macroeconomic data remaining strong, as the current rally in world markets is driven more by liquidity than fundamentals. So, watch the dollar, forget the Dow.
On the economic front, the US will release initial jobless claims, November retail sales, preliminary reading for December on consumer sentiment and the trade deficit for October. All these data are very important and would shed light on the US economy. Retail sales for November would be especially important to assess the outcome of Black Friday.
Back home, India’s economic growth would be put to test again as industrial and manufacturing output for the month of October would be closely watched. After September’s stellar industrial performance and last week’s surprising GDP numbers, the bar would be higher for the Index of Industrial Production data for October.
Technically, the markets are in a strong consolidation phase and the chances of a breakout on the positive side are more. A word of caution here—since the dollar rallied significantly on Friday, it’s going to be reflected on Monday and this is an extraordinary factor, which would force a weak opening followed by an initial weak spell on the Indian bourses, despite the markets looking strong technically. If, for any reason, the market brushes aside the dollar effect, there would be gains. In terms of support and resistance, the Nifty on its way up is likely to come across its first resistance at 5,157 points. This would be a strong resistance, but if it is crossed, the next resistance would come at 5,197 points, which would be a moderate but important resistance level as a crossover of this resistance with good volumes would ensure a fresh short rally in the Nifty, which will see the next resistance at 5,247 and 5,313 points.
On its way down, the Nifty would see first support at 5,078 points, which is a moderate but important support level, and if this level goes then the next support level would come at 4,993 points followed by a strong support at 4,912 points.
Among individual stocks, this week Welspun Gujarat Stahl Rohren Ltd, HCL Technologies Ltd and Bata India Ltd look good on the charts. Welspun Gujarat at its last closing price of Rs278 has a target of Rs292 and a stop-loss of Rs267. HCL Technologies at its last close of Rs339.9 has a target of 352 and a stop-loss of Rs327. Bata India at its last close of Rs184.55 has a target of Rs193 and a stop-loss of Rs176.
From last week’s recommendations, Praj Industries Ltd, Jindal Saw and LIC Housing Finance Ltd all met their targets very easily.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Dec 06 2009. 09 21 PM IST