- March 3, 2021
- Posted by: Amit Pabari
- Category: Currency
Currency markets have recently been taking their cues from the global bond market, where yields have surged in anticipation of accelerated economic recovery. The impact of the vaccine and the massive fiscal stimulus is ruling within the system. Between December’s package and the one that will be approved in March, the US is on the verge to give support of about 14 percent of GDP. The UK is likely to extend its support and announce another 5 percent of financial assistance in terms of the furlough program and give some tax breaks to small and medium-sized businesses. With increased assistance by the government and prospects of speedy economic recovery have rose the expectations that of a spike in inflation that triggered a selloff in the bonds and equities.
Looking at the dollar-rupee’s ferocious move, one can truly relate to the saying, “There are decades when nothing happens and then there are days when decades happen!”
The breakout indicates the 11 months long bearish trend has come to an end, and the bulls have regained control. Well, what exactly turned the table has been the thought in every trader’s mind and what will be the next move?
Dollar rebound: The dollar index extended gains following the last week’s bullish reversal is trading above 91.20 levels on the back of the persistent sentiment favouring the dollar. The reversion of the recent weakness in the dollar came in tandem with the strong bounce of yields. While the reflation trade continues to keep bullish attempts in the dollar contained, a shift of concerns regarding a pick-up in inflation originating from the expected extra fiscal stimulus could provide some area of strength in the dollar and extending the gains above 91.50 levels.
Rising US Bond Yields: The US 10-year bond yields are on rising since the beginning of the year and have risen from 0.95 to 1.42 levels to date. However, a turnaround came after the auction of the US 7 year bond worth $62 billion conducted last week, received a tepid response amid the expectation of US stimulus. This lead to a spike in the US 10y yield, which had crossed the 1.60 percent mark. On the other hand, the longer-term US inflation expectation that was on rise so far, has fallen to its lowest leading making the 10-year US real rate of -0.65 percent which was about -1 percent earlier. If the yields are on rising and inflation soothes giving further escalation to real yields, it would lead to a flight of capital back to the U.S. and thereby, weakening of emerging market currencies and boosting the dollar.
Accumulated Carry Trades: There was a huge amount of accumulated carry trades by exporters and carry traders that got compelled and attracted to cover while the trend was appreciating and premiums were rising. While importers on the other side were complacent to buy considering the euphoria in the markets and increased premium cost to hedge. Further, the unwinding of the short-covering by carry traders and buying by importers aggravated the move in Dollar-Rupee.
RBI forwards: The net RBI’s forward outstanding position by end-Dec is nearly $40 billion. The same has been translated into carry trades as forward premiums are above 5 percent across the curve. Further, RBI could unwind their position by financial year-end (March-end) and match asset-liability columns. For this, Rupee should be trading at RBI’s weighted average levels to avoid FX loss. And hence, RBI could allow Rupee to depreciate till RBI’s balance sheet breakeven point, which could be 74.00.
Prospected Inflows: For the current month, there are a couple of IPOs lined up that sums to more than Rs 14500 crore. Further, fundraise pertaining to Bank of Baroda’s QIP issue worth Rs 4500 crore coupled with IIFL Finance’s public issue of bonds to raise Rs 1,000 crore could limit bring in the foreign funds into the country. Leading which, the pace of rupee depreciation could slow down and rupee might remain supported amid pipeline of inflows.
Economic rebound: The latest prints of the GDP suggest that the economy is on the track of recovering. After facing nearly 24 percent contraction in Q1 followed by a 7.5 percent contraction n Q2, the economy entered the expansion phase from Q3 registering a 0.4 percent growth. Also, the sustained rise in the GST revenues which crossed Rs 1 trillion for the fifth time in a row is a clear indication of the economic recovery and offering relief to policymakers seeking to bridge a massive revenue shortfall and relieve government deficits up to a certain extent.
As seen, a long-term correction in the Dollar-Rupee since April high has come to a dramatic end and the pair has resumed its upward journey.
Historically, it has been observed that the recovery of the Dollar-Rupee is steady as seen in the past 11 months but depreciation is sharp as witnessed in the last week. Considering the present scenario it seems that the near-term bottom for the pair has been formed close to 72.30 which is also a 55 percent retracement of the previous move from 68-77 levels. Moving forward, the bullish reversal rally is likely to continue till 74.00-74.50 levels by the end-Mar to Mid-April with some minor pullback up-to 72.80 to 73.00 levels.
Thin Margin exporters: Following the risk management policy, if the costing for fresh orders are taken above 73.20 levels, thin margin exporters are suggested to participate and sell 60 percent of their exposures close to 73.50-73.70 levels. For the balance, one can hold with the stop-loss of 73.20 levels on a closing basis.
Thick Margin Exporters: Thick margin exporters who have covered close to 73.50-73.70 levels can hold with a stop-loss of 73.20 on a closing basis for a target of 73.80-74.00 levels.
Importers: Importers who haven’t covered till mid-April around 72.50-72.70 levels are suggested to buy on every dip below 73.20 levels.
–Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.