Friday, March 1, 2013

A View on the Forex (Foreign Currencies) Market

So, as expected, the market has fallen. It was probably holding on just because of the budget. As expected, the budget (being the last of the UPA - 2 regime), couldn't have been a reformist one. And because of the condition the country is in, it couldn't have been a populist one too. We are in dire need of money. With no reforms, it is sure to have an effect on the equity markets. Not only that, it will also affect the Forex markets and the Commodities markets. This post discusses just that - the effect of the Budget 2013 on the Equities, Commodities and Forex space.

First of all, let us do some logical reasoning. Following were the announcements made in the beginning of the budget speech by the Finance Minister, Mr. P Chidambaram:
  1. Global economic growth slowed from 3.9% in 2011 to 3.2% in 2012
  2. In the current year, CSO has estimated growth at 5% while the RBI estimate is 5.5%
  3. Fiscal Deficit stands at -5.3% of GDP in the current year and -4.8% estimated for 2013-14
  4. India needs over USD 75 billion to finance the Current Account Deficit both this year and next year
  5. The only routes available to India are FDI, FIIs and ECBs. 
With a non-reformist budget and with the Indian opposition, FDI is difficult. With no immediate hopes for recovery and with rumours of a possible sovereign rating downgrade by Fitch, FII money is expected to go out. The money, of course, will be taken out of the equities markets. No points for guessing the direction of the equity markets. This is completely in line with our earlier post giving a target of 4300 for the Nifty. And I also happen to find support from Mr. Sushil Kedia, who has mentioned that he is also open to targets of 4500.

Money going out of the equity markets has to be invested somewhere. There are believed to be only two safe asset classes (though, I no longer believe that) - i.e. Gold and the US dollar. Gold, however, usually, has a negative correlation with the US dollar. If we look at the international spot Gold chart, we find that $1530-$1540 is quite a strong support for Gold. If it breaks that level decisively, which is still not clear whether it will or will not, we should be looking for a level between $1200-1300. Whichever direction Gold has to take, it should take in the next few days (or weeks??) and if it does decide to go down, guess what's going to happen to the USD? As it is, with money moving out of India, at least some of it is going to be invested in the USD, if not all. And that "some" is enough to push the dollar index higher, much higher. And if the USD appreciates, it is going to have an obvious impact on Crude, Copper and the other base metals too. And, if the USD appreciates, obviously, it is going to depreciate the INR in the USDINR currency pair. 


That was just logical thinking. Now let us come down to specifics. And the actual technical analysis. Attached above is the daily chart of the spot USDINR. Looking at the pattern, it seems to be a perfect example of the inverted head and shoulders pattern, which is a bullish signal. When the bottom of the 'head' was formed at 51.50, the neckline was close to 56, a distance of 4.50. With the neckline now being close to 54.90, a break of this level suggests a target of 59.40 for the USDINR spot rate. Well, the alternative scenario could be that the USDINR fails to break this level and then moves beyond the shoulder at 53. A close below 52.50 could be hugely negative for this currency pair. But, in the current fundamental situation, the alternative scenario looks like a distant dream. 


Not only this, if we also have a look at the weekly chart of the USDINR attached above, it seems to be making a symmetrical triangle pattern. Technically speaking, a symmetrical triangle pattern could break out in any direction, but it is (usually) considered to be a bullish pattern. Not only that, the last candle being a candlestick formation by the name of 'hammer' is a bullish formation. In the case of a hammer, it is usually quite difficult for the price to break the long lower/upper shadow. This week's hammer has its lower shadow at 53.64. Though, the triangle breakout stands only above 54.90, yet I wouldn't mind taking a risk by entering at the current levels with a stop loss of 53.60.


Now, if the INR is going to depreciate, the same bullishness should be visible in the other currency pairs also. Yes, it is. Like you can see in the weekly chart of EURINR (Euro against the Indian Rupee) shown above. This chart shows a very long trendline which has been in place since April 2010, almost 3 years long. Not only that this trendline has already been tested 4 times showing that this support of 69 may not be broken soon (also signifying that if it is broken, it is going to be quite significant for this currency pair. This again seems like a bleak possibility in the current fundamental scenario). Also shown on the chart is a horizontal line at 70. This line will act as a good support in view of it being acting as the resistance for sometime. Also the hammer formation in this near this support signifies that this level of 70 may be difficult to break. Also, it forms a right angled triangle with a flat top, which is a bullish pattern and which has given us a target of 76.

Well, am I alone claiming this? Of course not, there is always support. In this case I have support from Swati Bhat, who reported on Reuters. In view of the above possibilities, I would say that if you are a currencies trader and are looking for an entry point, then THIS IS IT.

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Happy Investing!