For the last three weeks, we had been warning about substantial weakness in the six month forward premiums on USD/INR, and had called for the six-month forwards testing the 41.50/44.50 level. Six-month forwards declined to 40 paisa on Thursday. However the distribution and selling evident in dollar forwards has not been reflected in spot USD/INR.
Spot USD/INR continues to consolidate inside a tight trading range of 46.24-46.42. The greenback was well contained below 46.45 because of tight currency management by the state-led banks as well as lowered inflationary worries because of softer international crude prices. This has resulted in a trading congestion lasting five weeks, where the prices have hovered in a tight range between 46.24-46.42, on a closing basis.
In technical analysis, congestion or a trading range results when there is no new information coming into the market to move prices higher or lower. A homeostasis results. But it is from such a situation that historical volatility on the spot, till now at very low levels, begins to consolidate for an eventual blowout.
'Stable' exchange rates might please the mandarins in the finance ministry, but this gives rise to complacency. It is this precise situation that calls for extreme alertness from the importer and exporter community.
Changes in trend or a continuation of the previous trend have normally resulted from such continued low levels of historical volatility. The five-week long congestion has resulted in volatilities falling, making the spot vulnerable to a big move in the coming weeks.
For the last three weeks we have been unable to close on a Friday above 46.32. This has resulted in a 'double top' or a twin-peaks pattern on the spot on a weekly closing basis. Technical analysis of the pair on the higher, weekly time frame suggests that 46.32 will be zone that trade will look to protect on any weekly close.
With resistance capped at 46.32 on the weekly charts and 46.42 on the daily charts, key support for the dollar emerges at 46.24 on the weekly charts and 46.13 on the daily charts. Any decisive break on either side will determine future direction of USD/INR. The next support for the break below 46.13 will be 46.03/45.85 on the spot. Similarly, the resistance on a break above 46.42 will be 46.76/47.10.
Long term Elliott studies (a form of technical analysis which attempts to decipher sentiment prevalent in the form of waves), however suggest that there is a strong probability that 46.03 and 45.75/85 will be tested in the coming weeks.
What might just upset such a prognosis is the present status of interest rates in India and in the US. On September 9, the finance minister, categorically stated that interest rates will not be raised.
USD/INR should continue to move in a tight range till just before the FOMC meets in the US, to decide on interest rates there. Direction will be evident once that happens.
However a technical analysis of the 6m forward premiums suggest that while 41.50/44.00 paisa would be a strong level, there is an outside chance that it could sink to the 31paisa level.
Any level from 44.50 to 31 paisa, were it to occur, should be used by importers to hedge receivables, as the forwards are expected to begin to harden from hereon. Ideally they will look to retest the 71/72 paisa level and break out to hit the 98/100 paisa mark soon.
Exporters: Our call three weeks ago for exporters to sell six month dollar forward around the 57/59 paisa mark was fruitful as the premiums crashed and met all our targets of 41.50/44.50 paisa.
We expect current levels to offer strong support. However, a test of 31.50 paisa is possible, though chances are remote. Exporters should however watch for a break of 46.24 on the spot.
This might trigger a spate of selling spiking the forwards to the 31.50 mark.
Importers: For the past few months we had been suggesting that importers wait and watch before they hedge. Specifically, on the spot, 46.49 and above was the key level above which hedges were imperative for importers.
However, with six-month forwards crashing to low levels, it would be a good idea for importers now, to begin to employ staggered hedges beginning here at 44 paisa onward right down to the 41.50 level, and if they get lucky at 31 paisa.
