Nov 21 2017

USDINR Ideas – Soverign Rating Boost

Rupee has witnessed a see-saw kind of volatility since I wrote my last article (dated 1Nov17 – please see below). Hope dollar importers have paid heed to my advice of hedging November liabilities around 64.50-60.

Rupee had surged to a short-term peak of 64.47 on 2 November and quickly weakened towards 65.40-50 within a couple of weeks.

 

On 16 November, Moody’s Investor Services upgraded India’s sovereign credit rating from Baa3 to Baa2. A huge international ‘thumbs up’ to India’s progress on economic and institutional reforms. Rupee opened at 64.75, stronger by a massive 57 paise from the previous close. Equities surged by more than a percent. Surprisingly, rupee lost most of its gains in the next two trading sessions, inching back towards 65.00-10. Such volatility poses an important question – if a sovereign ratings upgrade cannot make rupee post consistent gains, what possibly can?? Food for thought!!

 

FIIs have handsomely invested in Indian equities this month (after large outflows in Aug17, Sep17 and minor inflow in Oct17). FIIs have sold Indian debt this month after consistently investing in the last 7 months.

 

What’s in store ahead?

We could see a range play till the Gujarat elections outcome (18 December).

Technically, 64.50-60 will continue to act as good support (89-day Simple Moving Average at 64.54 (green colour line) and trendline support around 64.60). My sense is that 65.55-80 could act as critical resistances (trendline resistance around 65.40) while previous peaks were at 65.54 (14 November) and 65.89 (28 September).

Exporters: can increase hedge ratio using forwards when rupee weakens – first target 65.45-55, next target 65.80-90. Should diversify risk using at-the-money options.

Importers: first target to hedge 64.60-80 – hedge for short term. Consider vanilla options too.