Jul 06 2018

USDINR Ideas – A Tale of two currencies – 6Jul18

The dilemma in the financial market continues, (not to indicate that predicaments were absent in the past).

There is one particular catch-22 situation that I would like to highlight.

Since beginning of Apr’2018, the Chinese Yuan (green line) has weakened by 5.5% (impact of the ongoing US-China trade war).

During this period (and correspondingly), the Chinese equities (Shanghai Composite – blue line) has plunged more than 13%.

The Indian Rupee (orange line), reacting to Yuan’s weakness, has declined a similar 5.5%; and so has many Asian currencies who have witnessed similar declines.

Correspondingly, the Indian equity indices (NSE and BSE) have been surprisingly resilient – NSE (red line) has gained by (hold your breath) 5.8% during this period.

DILEMMA INDEED.

Now, where does this lead to directional ideas for Rupee or Nifty – difficult to indicate. One thing you can conclude with a certain degree of confidence – pessimism is close to its peak – dollar index might not go beyond 95.00-95.50. Yuan, Rupee and Asian currencies might recover. Chinese equities might recover too. Difficult to say about Indian equities – they will probably trade range bound.

Spot at 69, 1 year forward premium around Rs. 3 to a dollar, 1 year forward rate is at 72. Selling (10-15%) dollars for long term is not a bad idea.

With spot having weakened more than forward premiums, vanilla options would have worked out well too.