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.
- 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.
- 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.
- 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.