Rupee Weekly

INR Weekly
November 2, 2009
Fundamental Analysis

Dollar Futures rose by 2.6% initially in the week but gave up its gains as USDINR became the target of high volatility witnessed in asset classes across the globe. A conservative monetary policy and a weaker stock markets were the prime movers of the pair which went on to make its high of Rs.47.74/USD after opening the week at Rs.46.51/USD but fell to close at 47.06. Equity and commodities tumbled across the globe as dollar index rose from 14 month lows,causing fund managers to liquidate their positions in riskier asset classes.
Monetary Policy

The Reserve Bank Of India came on with its quarterly monetary policy on Tuesday. Withdrawal of stimulus packages along with Inflationary concerns were the key features of this policy. As indication of shift in focus from economic downtrend to price stability was evident from the policy statement, stock market weakened along with bond yields with Nifty closing 135 points lower after release of the monetary policy.

Dollar Index – Driver of USDINR?
Dollar Index which for past six months has become an indicator of money flow into various asset classes, rose this week after making a 14 month low of 74.87. The rise of the benchmark index from the lows was responsible for fall of equities and commodities the world over. The benchmark touched 76.58 a rise of 2.28 % from the bottom. Although this can be stated as a pullback rally, we had anticipated such move in our previous week's report where we argued that export based economies will start feeling the heat of a weaker dollar and they might start buying dollar from here onwards. This came out to be true with Euro and Japanese Yen becoming the major currencies falling against the dollar. Only a stronger than expected GDP growth of the U.S economy did exert some pressure on Dollar index which fell to 75.7 levels after data showed U.S
economy grew by 3.5% from expectation of growth of 3.2%. Another key factor that has come into light in past few months is the influence of Dollar Index on USDINR pair. Although Dollar Index is instrumental in influencing all major asset classes, looking at the partly convertible nature of Indian Rupee, the affect should have been limited.

However during the previous two months the correlation between dollar index and USDINR has been close to 90% indicating a strong relationship. This is one of the key reason's why RBI interference, if any has not been working on currency pair making it more sensitive to global economy rather than Indian factors in specific.
Conclusion

Apart from the trend a key concern that seems to be building for currency hedgers is the volatility in the currency pair. The daily volatility which had fallen to less than 25 paisa lately rose back to touch 36 paisa. Although rupee is no stranger to such high volatilities, the last when such movement was seen was during the
economic crises that played havoc with the financial markets. With major Central Banks all set to increase their interest rate in coming quarters and withdrawing stimulus packages along with absence of a definite trend in major currency pairs we feel this volatility is expected to rise in coming days. The Trade data of India which will be released on Tuesday will provide an important direction to the pair while in the international markets it will be interest rate of European Central Bank and Bank of England that will assume its significance. USDINR is expected to trade in range of Rs.46/USD to Rs.47.5/USD as a clear long term trend will continue to evade the markets.

The charts of USDINR (spot) indicate that the current rally in the currency pair was nothing more than a pull back. This statement can be further complimented by the fact that the rally halted near 50% retracement
of the down move. We expect 47.65 levels to be a critical resistance for Spot USDINR while 46.50 will act as a crucial support. A breach of any of these levels will lead to start of a new trend in the currency pair.