USD/INR: A Favorite Asset Class

The USD/INR has become one of the most favorite asset classes over the past year. And why not, it has been a key component of the Asian carry trade baskets.

USD/INR : A Broader picture:
Over the past year, USD/INR has been an highly contested dual between the bulls and the bears.
Bears have been in command ever since the global crisis emerged out of Europe since 2009. This followed by a host of other domestic problems like corruption stung Government`s ever dropping credibility, along with the ballooning fiscal & current account deficits, had threatened India’s credit rating, which would completely flush out the foreign funds. All this had almost painted a gloomy outlook for one of the World`s fastest growing economy, and then came ‘The Avengers’, saving the World with global liquidity.

This Marvel comics like Superheroes, and believers of quantitative easing, mainly Uncle Ben (Bernanke), Super Mario(Draghi) and of late the Japanese Abe(nomics) supporting the global liquidity.This has seen an unprecedented flow of funds to the better yielding assets in the emerging economies and India being one of them was a major receiver of these funds.

However, this wouldn`t have been possible without our very own Avenger, ‘Chidu’ (Finance minister, P.C. Chidambaram). Like a superhero, he has single handedly revived the ailing Indian sentiment right from managing Fiscal Deficit, wooing global investors with road shows, delivering a host of financial reforms, and saving India from a looming credit downgrade. And as it is said, “Fortune favors the brave,” we had luck tilting Chidu`s way, with the cooling inflation, and drop in the CAD worsening commodities – Gold & Crude.

As this interesting story finally moves towards its climax, we have the USD/INR pair which is on the verge of a major breakout. The pair has almost being boxed within the 53.90 – 55 range over the past few months. With a host of major reforms and support from nearly $10bn plus foreign fund inflows in the Indian Equities and Debt markets, the INR has finally managed to drift lower, and now stands the test of a fortress like level at the bottom of the triangle, 53.60.

The pair should be able to defend the 53.60 support, and should strongly bounce back. 53.60 also forms the 38.2% retracement level of the 57.20 – 51.30 move. The pair has been trading below its 100 & 200 DMAs. Also, a short downside rally to 53.60 seems possible as the RSI (33.65) & Stochastics – Slow (60.080) indicate that the rally still has some steam left. A dovish FOMC and hawkish ECB would help to contain the EUR/USD march, whose strength is highly beneficial for the pair.

The pair is headed for its most volatile period in the second half of the year, as it braces towards major high risk events like, end of QE3, German Elections, and Indian Central Government Elections, change of guard at the Reserve Bank of India, and the India Corporate sector which still don’t seem to be out of the woods yet. And this can be seen as a good buy on dips opportunity.

The only argument, which could put an end to this party, would be more than anticipated rate cut of 25bps, or a very hawkish central bank tone which might see the bonds and the equity rally, propelling the pair to cross the barrier 53.60!

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