Rupee Stronger Despite Weak Fundamentals

The Indian rupee has received a new lease on 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 person responsible for bringing the rupee and the Indian economy back to 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 – this may be good for businesses but it doesn't address the outflow of foreign funds that is at the root of all of India’s current problems. 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 still doesn't addressing the primary problem.

So why is the market so euphoric about Rajan?

Perhaps markets are still giving Rajan the benefit of the doubt, and are waiting for some big major announcement. Furthermore, we have not seen any significant pullback in the USD/INR since the push from 59.0 back in August, and hence we are simply looking at an overdue pullback rather than a true reflection of market sentiment.

Hourly Chart
USD/INR 1" width="580" height="394">
Case in point, the USD/INR barely fell 60 points against the USD on Friday following the NFP announcement, when the USD took an absolute beating due to increased speculation that the Fed may change its mind about a tapering action in 2013.

That may sound unlikely, but unfortunately it is the exact thinking by market participants looking at Gold and USD/JPY prices. Hence it is still interesting to note that the USD/INR may not be as bearish as we think it may be, despite current momentum clearly to the downside. The line in the sand right now would be the lows of Friday – if prices hold around that level, the chances of a bullish recovery 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 a stronger bullish recovery takes over once more.

Weekly Chart
USD/INR 2" width="580" height="394">Looking at the weekly chart, it seems that price was unable to break above the 161.8% Fib extension of the original bullish leg before the Channel breakout happened. In theory, price could descend back further toward the Channel Top until it is reached before the stronger bullish recovery mentioned above happens, which is a long way down from where we are currently.

This is in line with Stochastic readings which are signalling the start of a bearish cycle right now. Hence, even though fundamentals suggest that the rupee should still be moving higher, momentum is still pointing lower and traders will be taking high risks by going long the USD/INR at current levels.

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