India’s Worst Currency Too Weak With 5% Growth: Market ReversalJoseph Ciolli and Jeanette Rodrigues
India’s rupee, the worst-performing currency in June, is poised to rebound from near a record low as trading patterns suggest the rout in emerging markets prompted by shifting sentiment on U.S. stimulus is overdone.
The currency’s 14-day relative strength index against the dollar this week crossed the 70 threshold that signals it had fallen too far, too fast. Options traders were paying the highest premium in more than a year to sell the rupee on July 8, 25-delta risk reversal rates show. The measure had what’s known as a Z-score of 1.6 percent, meaning the premium was almost two units of standard deviation from the 20-day average.
The rupee has weakened 5.3 percent since May 31, the fourth-most among more than 75 currencies tracked by Bloomberg, after the Federal Reserve signaled it may pare stimulus efforts seen as debasing the dollar. India and other developing economies, whose currencies had benefited most from the Fed’s policies, have felt the brunt of the stronger dollar burden. The weaker rupee has kept the Reserve Bank of India from cutting interest rates for a fourth time this year to provide stimulus.
“Although the rupee touched a record low, the momentum in the drop slowed, suggesting investors may not be as bullish on the dollar as they were earlier,” Dhiren Sarin, the chief technical strategist for Asia-Pacific at Barclays Plc in Singapore, said in a July 10 phone interview. “So it does look like the rupee can strengthen in the short term.”
India’s rupee slipped to 61.2125 per dollar on July 8 before weakening to 59.6800 at 12:30 p.m. in New York. It has depreciated from a high for this year of 52.8900 on Feb. 6.
The rupee is also testing a boundary of its 20-day Bollinger band, indicating it’s due for a reversal. The currency came within 0.03 percent of breaking the upper limit of the dollar-rupee Bollinger band on July 8. The measures, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset’s trajectory.
The rupee’s 14-day relative strength index rose to 70.1 on July 8, exceeding the barrier at 70 that indicates the currency is oversold.
India, along with China and Hong Kong, is in a “high-risk danger zone” if a pullback by the Fed prompts investors to punish countries that have weakening economic fundamentals and are too slow to reform, according to a June 28 report from Nomura Holdings Inc.
The current-account deficit in Asia’s third-largest economy widened to a record 4.8 percent of gross domestic product in the year ended March 31. While growth slowed to a decade-low of 5 percent, it’s still above the 3.1 percent predicted by the International Monetary Fund for the global economy this year.
Global funds cut holdings of Indian stocks and bonds by $8.1 billion after the Fed signaled potential tapering of its $85 billion in monthly purchases of U.S. Treasuries and mortgage-backed debt.
Fed officials are split on the timing of the eventual wind-down of the central bank’s bond-buying program, according to minutes of policy makers’ last meeting released yesterday.
Many Fed officials want to see more signs employment is picking up before they’ll begin slowing the pace of bond purchases, while “several members” judged that a reduction would likely be soon warranted, the record showed.
“Tapering risks are going to continue in the third quarter and probably into the fourth quarter, as well,” Win Thin, the global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, said in a July 9 phone interview. “There will be a lot of volatility.” Emerging markets are “going to stay under pressure,” he said.
JPMorgan Chase & Co.’s Global FX Volatility Index, based on currency-option premiums, rose to 10.73 percent yesterday after reaching 11.96 on June 24, its highest level since January 2012. One-month implied volatility in India’s rupee touched 13.64 percent on July 9, the most since June 2012.
The rupee’s decline in June led RBI Governor Duvvuri Subbarao to refrain from adding to three interest-rate cuts in 2013 that helped push the benchmark 10-year yield to a 3 1/2-year low on May 24.
Trading patterns indicate the rupee may strengthen to 58 in coming weeks, according to Barclays and Edelweiss Financial Advisors Ltd. The British bank sees the Indian currency resuming its drop soon after, giving investors the opportunity to buy the dollar and benefit from a better exchange rate.
The rupee may strengthen toward 59.15 and then 58.95, with such a move being “a favorable setup” for a weakening back toward an unprecedented 61.80 and then to about 63 to 63.50, according to Sarin of Barclays.
A so-called harmonic AB=CD pattern formed when the dollar rose to a record against the rupee on July 8, suggesting the high is a significant level “which may not be retested before a meaningful correction,” according to Sahil Kapoor, a technical analyst at Edelweiss in Mumbai.
Kapoor is referring to a four-stage wave pattern that’s used to identify peaks and trenches for a currency pair and helps investors find an entry or exit point. Trading patterns show that the dollar’s rally may soon run out of steam, he said.
If the rupee is unable to stay stronger than 59 in the spot market, it may fall to new lows, Kapoor said in a July 9 e-mail.
Indian regulators announced on July 8 steps to curb speculation in the currency derivatives market. The Reserve Bank of India barred banks from proprietary futures and options trades and the Securities and Exchange Board of India doubled margins and said it will curtail open position limits.
The central bank may impose further curbs on rupee trading by lowering lenders’ net open position limits, according to a person with knowledge of the matter, who asked not to be identified because the information is confidential. They were referring to the amount of foreign-exchange contracts that investors can hold without opposing trade covers.
The directives that the Reserve Bank has already announced will cause the rupee to strengthen in coming days, according to ANZ Banking Group Ltd. and Commonwealth Bank of Australia, who will buy the dollar on bouts of rupee strength.
“The rupee is oversold in terms of speculation, but there is no reprieve from fundamentals,” Andy Ji, a strategist at CBA in Singapore, said in a July 9 e-mail interview. “Will I sell the dollar versus the rupee knowing that dollar-strength and India’s high current-account deficit will persist?”