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Be Cautious And Buy USD/INR Futures On Dips

Monday, November 25, 2013
By Pramit Brahmbhatt

Pramit Brahmbhatt is CEO of Alpari Financial Services (India)

At the start of last week the Rupee traded strong taking cues from the local equities which rose more than 2% on last Monday, to mark their biggest single-day gain in a month, tracking gains in other Asian markets, cheered by the prospect of extended stimulus in the United States and real economic reform in China. But in the second half of the last week the Rupee depreciated and gave up all its gain taking cues from dollar which traded strong after the minutes from the U.S. Federal Reserve’s October policy meeting suggested that the central bank could soon move to taper monetary stimulus. Resistance for USD/INR (Spot) pair is at 63.40 - 63.50 levels; if these levels are breached convincingly then expect Rupee to depreciate further over 64.00 levels. The trading range for the USD/INR pair for the week is expected to be within 62 to 64.

It is recommended to be cautious and Buy USDINR Futures on dips with the appropriate stop loss as Rupee is expected to depreciate against dollar. Pivot Point for the Pair is at 62.59 and below is the Support & Resistance levels.

FOMC minutes surprised the markets stating that the possibility to start tapering has been discussed for the months ahead. At this stage, we do not know when the QE unwind will start, yet we are willing to believe that it will start. Despite the Fed Chair-designate Yellen’s reluctance to remove monetary support given the fragility of US recovery, markets are pricing in the tapering.

There are two good things about the unwinding of the QE3. Firstly, it will prevent the Fed’s balance sheet to expand forever. As of November 13th, the Fed’s total assets reached USD 3.9 trillion - historical high - and will soon run above USD 4 trillion with Fed continuing to buy USD 85bn worth bonds every month.
This is quite a big number and Fed should gently reduce the expansion of its balance sheet before it runs into a wall. Secondly, the Fed’s injection of USD 85bn on monthly basis created an artificial cheap money environment and triggered unusually high asset prices all over the world. Although we are not going to qualify the rising asset prices as bubble (a bubble is only recognized as bubble when it bursts), the growing uncertainties and unanswered questions (are the current valuations on equity markets too rich?) trigger volatility spikes and keep the liquidity in the financial markets preventing the transmission to real economy. A QE-unwind timetable should help to remedy to these uncertainties and high volatilities. Despite a selloff expected in the equities and EM markets, the next equilibrium (although lower) should be more stable one.

Gold’s drop to a four-month low this week which is expected to attract buyers in Asia, but the demand would curb as consumers may be waiting for the market to go even lower. Spot gold fell to $1,240.69 an ounce on last Wednesday, its lowest since early July, on fears the US Federal Reserve could soon begin rolling back its stimulus measures. The metal has been trading below $1,300 an ounce for nearly two weeks but demand has failed to pick up much, as Asian consumers already bought a lot at the time of earlier price drops this year.

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