Apr 27 2018

USDINR Ideas – Sanity will return – 27Apr2018

USDINR validated my last week’s argument, brilliantly – “Financial markets (including rupee) are inherently volatile by nature” – please check my research below. Well, my other argument did not hold – “My sense is 66.245 – 66.55 region will act as a good resistance for this dollar rally” – that resistance region gave away – obviously, markets have ideas beyond normal comprehension.


The primary drivers to rupee weakness, rising US 10-year bond yields and surging crude prices, seems to have taken a breather. The US 10-year yields have taken a dip below the critical long term resistance of 3% – recall that 3% was attempted twice (Sep-13 and Dec-13) but not broken. As such 3% will be difficult to break immediately. It will eventually be broken – probably, after a few weeks/fortnights – if inflationary tendencies in the US forces the Fed to continue on its interest rate tightening path (a high probability scenario). Brent crude has stabilized around 74-75 for the past few days.


Analyzing the daily candlestick charts, notice that USDINR’s high of yesterday as well as day before yesterday is at 66.90 – it is a tweezer top *. After such a stupendous dollar rally, a tweezer top warrants caution. Usually, such an indicator signals a trend change (or at least a corrective counter reaction). Needless to say, USDINR momentum indicators are heavily overbought. There are price gaps to be filled (notice the blue and purple horizontal lines). My sense is that we are close to the peak of dollar rally – Karnataka election results will also play its part.


Exporters: am sure you must be selling dollars. Continue that until you reach a comfortable hedge ratio. Use some at-the-money vanilla options in addition to forwards. Structured options (conservative ones) are also looking attractive – a 67-69 Range Forward for 6 months is a good hedge.

Importers: can target levels below 66 to start hedging for immediate term. Vanilla options will work better than forwards. 45 paise is the price for a 1-month at-the-money call – quite cheap for the recent volatility.


* A tweezer top is formed when two or more candlesticks touch the same level on successive periods.