Feb 27 2018

USDINR Ideas – Will the nervousness prolong?? – 27Feb18

The rupee was trading range-bound between 63.40-64.40 for a month and a half since the dawn of new year. Abruptly, within 4 trading days, rupee weakened from 63.80 to 65.10. What drove this weakness is common knowledge. Let’s make a calculated guess as to what lies ahead.

Consider the following:

  1. After pumping in handsomely in Jan18, FII have turned negative in Feb18 (net outflows of $1.35 bln till date).
  2. The PNB fiasco has completely derailed the import financing market. Importers are rarely getting funding options, and whenever they are, spreads above LIBOR are exorbitant. As such, importers will have to pay on their due dates. Couple this with increasing nervousness about PSU banks, dollar buyers will prefer to keep their positions hedged.
  3. With global equity collapse during the first week of February still fresh in peoples’ minds, don’t think Indian equities are going to surge to fresh peaks anytime soon.

Following the recent rupee weakening move, momentum indicators are inching towards (USD) overbought levels. There is a price gap between 64.2250 (16Feb18) and 64.41 (20Feb18) – notice the blue horizontal lines. Usually, USDINR closes most of its price gaps. The downward moving trendline (green colour), connecting the dollar peaks of 65.89 (28Sep17) and 65.54 (14Nov17) comes around 64.80-65.00.

My sense is that USDINR will face resistance around 65.00-65.50. March is annual closing for accounting and book keeping purposes and as such markets could refrain from excessive volatility.

Exporters: should start selling dollars at levels above 65.00. Keep increasing hedged positions on every 20-30 paise uptick. Should use forwards and vanilla options too. Can also consider conservative structured options.

Importers: target levels around 64.30-64.40 to start hedging for short term.