USD/INR: USD Strength Bring New Woes To RBI

If there’s someone that Reserve Bank of India Governor Subbarao want to murder right now, it must be Fed’s Chariman Ben Bernanke. Thanks to Bernanke’s surprise revelation on QE3 tapering timeline, USD has strengthened tremendously, and has been the difference which allowed USD/INR to push for yet another record high. This has made RBI’s already difficult task into an impossible one. Case in point, RBI has been aggressively buying INR via its agent banks after a new record high was made back on 11th June. Prices did climb down but stayed above the highs made on Jun 2012 (see weekly chart below), with price bouncing straight back up this week with the new high ceiling halting further advance.

Looking on balance of things, if Subbarao really blames Bernanke for tilting USD/INR higher, he may be a little unfair. The rally of USD/INR this week has been in spite of a weakening of USD as seen in EUR/USD, AUD/USD and other risk currencies. This highlights the extreme inherent weakness of INR currently, and suggest that USD/INR could have broken the ceiling eventually. What Bernanke did was simply accelerate the process, and it is likely not by much considering that the rising Channel Top could have nudged in in just a day or 2 later, or by next week latest.

4 Hourly Chart
USD/INR 1" width="580" height="394">
The question now is where next? The issue with record highs is that we are unable to find any historical reference to help us gauge where potential support/resistances could lie. The conventional axiom that “what goes up must come down” may not apply as well, as the record highs may illicit strong bullish sentiment which may result in stronger bullish acceleration. As such, the prudent think to do is the perhaps wait for clearer signs before betting the farm on whether price will go up or go down from here.

Weekly Chart
USD/INR 2" width="580" height="393">
This applies even for the weekly chart – even though a case for bullish breakout is strong, it its highly speculative if we buy USD/INR from here without any evidence of further longevity of the breakout. Stochastic readings are currently within the Overbought region, but both Stoch and Signal lines are flat, which isn’t particularly helpful. With this in mind, traders should look out for any reversal patterns and see how price reacts to short-term supports. Any breaking of supports would suggest that pullbacks may be significant, while any holding of support is a sign that USD/INR bulls still have room to run.

Fundamentally, the case for a weakening INR can be made. It is unlikely RBI will be able to increase interest rates from here to firm up the currency due to the dire shape the economy is in right now. Purchases of INR on the secondary market is also not feasible as a central bank pales in comparison to international money flows. Furthermore, India is facing a record current account deficit. As such there isn’t really any more money for them to buy INR without putting them in an even worse financial situation. The irony is that should they break the bank trying to firm up INR, the fact that Treasury/Central Bank is broke will only make the currency weaker than before, not stronger. As such, RBI is at the mercy of the ebb and flows of the market right now.

Original post