Jul 22 2017

USDINR Ideas Beware of the Lull

Author:-Mr. Ritesh Victor

Posted Date:-22-Jul-2017

Wow, what a market!! Beware of the lull.
Initially, it shakes and jolts you with bouts of excessive volatility (please recall the explosive moves between 66.30 to 68.80 in Nov/Dec’16 and from 68.40 to 64.40 in Feb/Mar’17) – when levels changed dramatically within a few days (and sometimes within a few hours too). Everyone was praying for stability (or more appropriately put, sanity) to return.
The current times are the reverse – everyone is begging for volatility (and sanity to return) – rupee is stuck between 64 and 65 for more than 3 months. Traders are having unusually long nap sessions – obviously, nothing much to work for. As the old saying goes, ‘When the VIX (volatility) is high, it’s time to buy – when the VIX is low it’s time to go’. In other words, when fear is rising and peaking, it is time to close your eyes and just buy. Conversely, a low VIX implies complacency and lack of fear – a bold ego that says I have nothing to worry about, stocks are going up always.  Often a bad move, because once the buying stops there is nothing left but sellers – then corrections (often painful ones) ensue. Complacency tears down the market equilibrium – in current USDINR situation, certain group of market participants (exporters) generally hedge and the other group (importers) are reluctant to hedge. One sided positioning has become extreme – perfect recipe for an explosion in volatility – not a good sign, drive carefully.
In the last 3 months, rupee has been immune to a lot of otherwise market moving (volatility creating) events and news. Asian currencies had weakened and then recovered – no impact on rupee. EURUSD and GBPUSD surged higher (and dollar index plummeted) – still minimal impact on rupee. Indian equities are soaring to all-time highs – no impact on rupee either. This tends to indicate that Rupee is becoming more of a managed float exchange rate – resistant to volatility creating news and events. How long will this last? Not very long.
On the daily USDINR technical charts, Bollinger Bands (a good volatility indicator) have narrowed considerably in the last 2 months – option volatilities are at multi-month lows. Historically, we have often seen explosion of market levels after prolonged periods of stability. BEWARE of the LULL.
Dr. Forex prescribes (Rx)
Exporters: For short term (1-3 months) – do vanilla options – premiums on such short term options are at their cheapest levels. For long term positions (6-12 months) – keep selling dollars on every uptick towards 64.60-80, to encash on forward premiums.
Structured options also look to be a good bet now. For 6 month maturity, Buy USD Put at 65 and Sell USD Call at 66.60 comes at 5 paise cost. Similarly, for 12 months, Buy USD Put at 66 and Sell USD Call at 68.50 cost 10 paise.
Importers: Please hedge 50% for short term (1-2 months). Despite the reluctance to hedge due to low volatility, it makes sense to hedge around 64.10-30 levels. Consider doing vanilla options to diversify risk, since option premiums are so low.