Came across this really cool magnetic encoder from from Austria Micro Sytems (AMS).
Provided up to 2048 counts per rev (cpr) over quadrature (A,B) and up to 12 bit resolution (4096?) over i2C. The price is just $1.65 (in qty 1000). Too good to be true?
Here is the block diagram of the same.. looks like it can run from 3.3v