May 03 2017

USDINR Ideas – Rupee poised towards 62 or 66!!

What a fantastic roller coaster ride it has been for the rupee!! What a rush!!

Dollar was sold (and rupee bought) as if there is no tomorrow. Multi-year dollar supports tumbled like a pack of cards on ice. Rupee broke levels as if exchange rates were just another number. Equities surged and euphoria never had a better time.  

Should we exercise caution or continue to bask in Indias growth story glory? My suggestion- prepare for the former and hope for the latter.

In this exuberance, consider the following facts:

  1. FII inflows (one of the primary drivers for rupee gain in March17) have slowed down significantly in April17. From $8.6 bn (equity + debt) in March17 to $3.5 bn in April17.
  2. A few Asian currencies {namely Korean Won (green line) and Japanese Yen (yellow line)} had gained along with the Indian Rupee (pink line) in Feb17 and Mar17. These currencies have weakened subsequently in Apr17 – Rupee did not. In this entire episode, Chinese Yuan (purple line) (which has had a good historic correlation with Rupee) has not gained at all. Clearly, Rupee looks like an outlier among the Asian currencies – check below the rebasing chart of Asian currencies. Will Rupees outperformance continue? TIME WILL TELL.
  3. Rarely has Rupee gained to such an extent in such a small period of time. Further gains will not only destroy export competitiveness (if anything is left now), it might also compel our big daddy (the RBI) to act (intervention to prevent rupee gains).
  4. Technically, dollar has been oversold (and rupee overbought) since mid Mar17. Rarely has liquid currencies been overbought or oversold for such an extended period of time.
  5. There were long standing up-gaps in USDINR daily prices. Notice the blue and pink horizontal lines in the chart above – check the price gaps at 63.91-64.03 and 64.27-64.55. These gaps have been filled. Any more technical interest for further rupee gains?? Doesnt seem so.
  6. Importers: please hedge. Use forwards and options both. Certainly consider vanilla USD Call options if you feel more rupee gains are in store.
    Exporters: have been regularly suggesting to do USD Put options. Continue doing so.

    All market participants: start doing options (if you havent started already). Now is one of the best times to do it. An option has a cost to pay – a sacrifice which will certainly be worthwhile.  A few options along with simple forwards work best in all market scenarios (especially now when uncertainty is at its peak).