Apr 20 2018

USDINR Ideas – Will the storm endure? – 20Apr2018

After trading range-bound around the 65 mark (+ – 20 paise) for a month and a half, rupee has suddenly weakened from 64.85 to 66.07 in a span of just 9 working days. Per se, it is just about 1.8% weakening. The market participants, no doubt, have been caught unawares. Most of them continue to feel – rupee was stable and will always remain stable – a perilous conclusion to arrive at. Media too, are doing their part, extending trendlines to forecast probable targets of 67-68 (and what not). In this chaos, let us analyse (and digest) certain facts.

 

  1. Financial markets (including rupee) are inherently volatile by nature. Sometimes they can be stable (and range-bound), but usually they are volatile. If they are stable for prolonged periods, be cautious and protect yourselves.
  2. In this rally, rupee has weakened in isolation – other comparable Asian currencies have not weakened. Dollar index (against major currencies) has been either weak or stable during this phase. This defies general market sense.
  3. Expensive crude is the predominant factor reported by the media for such a rupee weakening wave. Also note that INR NDF (non-deliverable forwards), traded in the off-shore markets, were consistently quoting higher prices – an indication that speculative long USD positions are getting built up. Remember, these positions will need to get squared too – recognize that market impact.

 

Technically, USDINR is overbought. 14-day RSI treads above the 70 mark and other momentum indicators are reaching extreme levels. Notice the price down-gap formed around 66.55 (10Mar’17) and 66.245 (14Mar’17) – the green horizontal lines. My sense is 66.245 – 66.55 region will act as a good resistance for this dollar rally. Also observe the price up-gap formed today over yesterday (blue horizontal lines). Price gaps usually fill up.

 

Exporters: please start selling some dollars (for medium term as well as long term). We were languishing with 64-65 realisations – 66+ spot with 4% forward premiums are a welcome boon. Certainly do some vanilla options in addition to forwards. Structured options (conservative ones) are good too – a 66.25-68.45 Range Forward for 6 months, look good.

Importers: if you want to hedge, choose vanilla options over forwards. A 1-month at-the-money Call costs 40 paise – not expensive considering the recent volatility.