Indian Rupee has received a new lease of life ever since new RBI Chief Rajan has been sworn in. This is largely due to the new steps Rajan has introduced in his first few days as the guy responsible to bring Rupee and the Indian economy back on their feet. However, the new guy has not introduced anything earth shattering. His first new measure was to provide exporters and importers flexibility in hedging forward currency contracts – good for businesses but not addressing the outflow of foreign funds that is the root of all India’s problem right now. The second measure was to offer swap lines below market rates for banks raising deposits from Indians abroad – yet another good move that is beneficial for businesses but again not addressing the main issue.
So why is the market so euphoric about Rajan?
Perhaps market is still giving Rajan the benefit of the doubt, and are waiting for the big major announcement. Furthermore, we have not seen any significant pullback in USD/INR since the push from 59.0 back in August, and hence we are simply looking at an overdue pullback and not a true reflection of market sentiment.
Case in point, USD/INR barely fell 60 points against USD on Friday following the NFP announcement, when USD took an absolute beating due to increase speculation that the Fed may change its mind about a tapering action in 2013. That may sound like a long shot, but unfortunately is the exact thinking by market participants looking at Gold and USD/JPY prices. Hence it is still interesting to note that USD/INR may not be as bearish as we think it may be, despite current momentum clearly on the downside. The line in the sand right now would be the lows of Friday – if prices hold around the level, the chances of bulls recovering becomes higher and a push towards 66.5 may be possible. If current soft support breaks, we could be in for another leg of bearish movement before stronger bullish recovery takes over once more.
Looking at weekly chart, it seems that price is unable to break above the 161.8% Fib extension of the original bullish leg before the Channel breakout happen. In theory, price could descend back further until Channel Top is reached before the stronger bullish recovery mentioned earlier happens, which is a long way down from where we are currently. This is in line with Stochastic readings which is signalling the start of a bearish cycle right now. Hence, even though fundamentals suggest that Rupee should still be moving higher, momentum is still pointing lower and traders will be taking high risks to long USD/INR at current levels.
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