The Indian Conundrum

Here's a trillion dollar economy growing at more than 8% - the second fastest in the world. The central bank is probably running the tightest monetary policy this side of the Mediterranean Sea, while the government is running an expansionary fiscal policy - a combination that should have seen the biggest currency traders in the world salivating. Of the dozen trillionaire countries, only Brazil offers higher real interest rates. And yet, the rupee drops 4.5% in 5 days flat with 2/3rds of the fall compressed in the 10 trading hours that were characterized by poor liquidity. So what gives? Looking at the currency market, one could be forgiven for thinking that "India Shining" had become "India Sinking" and we're about to do a Latino jig. Or was it program trading / portfolio rebalancing with the PKR being bought and INR being sold and an illiquid market doing the rest? And where was the RBI, with its self-professed objective of dampening volatility? Or is this higher volatility a deliberate attempt to attract speculators (and hence liquidity) to currency futures that start trading on August 29?

USDINR (43.42)

We had assumed that wave A was over in early July, but the move beyond 43.4750 could shift the end of wave A to this week's top at 43.87. The Fibonacci retracement targets for Wave B are at 42, 41.45, and 40.90. Alternatively, wave A could have topped in July and wave B is tracing out a flat / expanded flat for which the Fib targets would be 10 paise lower. The second scenario fits better with time considerations. A weekly shooting star with a gap up and the strong possibility of a gap down open next week paints a grim picture for the pair.

EURUSD (1.4773):

The euro is down 900 pips since the last issue. The four-day congestion above our stop-loss of 1.56 gave way, and an avalanche started after Trichet said he expected much lower growth for Q2 and Q3. However, Belgian and German sentiment has been better than forecast and should lead to some range trading between 1.47 and 1.50 early next week, before the decline towards 1.45 resumes.

GBPUSD (1.8507):

Cable lost 1300 pips as deteriorating economic data took its toll. With oil headed further down and no positives in sight, a decisive break of 1.85 will open the door towards 1.79-1.81.

USDJPY (110.04):

The pair moved up by 350 pips as the dollar gained across the board. However, the yen's relative out-performance pulled down the yen crosses substantially. While 107.50-108.50 offers strong support, a break above 110.70 would lead to a push towards 111.60 and then 113.

USDCHF (1.0989):

Swiss franc fell 750 pips - less than the euro but twice as much as the yen and is poised to carry its decline further towards the 2004 low of 1.1285.