Sep 25 2017

USDINR Ideas – Hurricane after the Lull

Hope you were “Beware of the Lull” and took necessary precautions. Please check my mail below dated 22Jul17. 

Participants in the rupee markets concluded that 64 rupees to a dollar is the norm and got accustomed to the lull (prolonged periods of sideways movement) and as such my regular advise of keeping liabilities hedged fell on deaf ears. After hovering around 63.80 to 64.50 for major part of last 4 months, we suddenly witness a burst in rupee volatility. Rupee plunged from 64.00 to 65.15 in 5 trading days. We see one category of market participants (you guessed it right, the importers), running helter-skelter – desperately looking for ideas to hedge short term liabilities.

 Lets introspect the recent past and learn for market volatility(have emphasized this earlier too – better late than never):

1.       There is nothing called the so-called norm. Levels change and it will change quicker than we can change our decisions/processes to hedge.

2.       For sustained peace of mind (and prosperity), it is better to keep short term liabilities hedged. Focus on business benchmarks (or budget rates) and hedge accordingly rather than targeting market peaks and bottoms – leave it to the professionals. 

Lets also analyse certain market indicators that have changed in the recent past:

1.       Indian markets have enjoyed healthy FII inflows into equity and debt markets from Feb17 to Jul17. Things changed a bit in Aug17 – when FII outflows from equity was matched by inflows into debt. In Sept17, FII outflows from equity continues and inflows into debt has been lower – hence pressurising our currency.

2.       Geo-political concerns have increased (courtesy aggressive posturing by North Korea and US).This tends to pressurize risky assets including Asian currencies (like Indian Rupee).

3.       Our Finance minister is talking about providing stimulus to boost growth (finally, he admits that economic growth has really slowed down). Another interest rate cut – possibly. With US Fed indicating a rate hike in December and RBI looking to lower rates, debt inflows into India could further slow down.

4.       After a non-stop bull run since beginning of this year, Indian equities ran out of steam and plunged 3% in 5 days. Negative equities could hurt short term rupee sentiment.

  What are the charts indicating?

The rupee weakness has been too much too quick and as such most of the momentum indicators are reaching overbought territory. There is a long standing unfilled gap at 65.28-65.38 – pink horizontal lines (formed on 24-27Mar17). Probably, rupee might reach to fill this gap. Subsequently, there could be a cooling period. Remember, there is a price gap at 66.25-66.55 – red horizontal lines (10-14Mar17).


My sense is rupee could remain weak in the short term. Equities could continue to decline a bit more. 

Dr. Forex prescribes:

Exporters: can start dollar selling (using forwards) from65.15-25 levels for medium term maturities. Can also look at long term dollar
selling on every dollar uptick. Use structured options to diversify risk.

Importers: hope you have hedged as I had been regularly suggesting. If still unhedged, vanilla options are the most reasonable
alternative left.