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Indian rupee: An early Fourth of July

Where will the rupee go? The next major stop would have to be 65

Written by JAMAL MECKLAI |
June 21, 2013 2:09:55 am

I was thinking a couple of days ago about how this year’s US Independence Day celebrations could turn out to be much more dramatic than usual,with the fireworks spilling into global markets and,indeed,to India,if the June non-farm payrolls (NFP) figures (to be) released on July 5 show that the US economy is steadily returning to strength.

Of course,the market snuck ahead of me,and when the Fed,at the close of its meeting on June 19,said they would continue to buy $85 billion a month of bonds but also made it clear that they were already accelerating to the QE3 exit,the sparks began to fly.

US bond yields shot higher,and the yield curve,which had already been steepening,tightened further—the spread between 10-year government bonds and 2-year Treasuries crossed 2%,its highest level since October 2011. Gold fell sharply and is resting nervously on a very long-term support,which,if it breaks,could open the door to my long-ago forecast of 1,200 an ounce. The rupee,of course,is crying in the rain.

It hasn’t (yet) touched 60,although it came perilously close at the opening yesterday,and,as is happening more and more frequently recently,Indian companies,the media and—sadly—RBI and the government are looking like rabbits trapped in the headlights of global volatility.

Where will the rupee go?

Well,on June 6,my technical team sent me a chart looking for a bottom of 62+; as a (relatively) lay person,I would have to say,now that we’ve (more or less) seen 60,the next major stop would have to be 65.

But can it really weaken that much? What will happen to the economy?

Well,I don’t know what will happen to the economy—except,of course,that the world never ends. But,it is significant that the rupee is at 60 when the dollar index (DXY) is not even 82. If the dollar is,indeed,as I believe,getting on a sustained uptrend,the DXY could easily reach 85,or even 90—in which case,65 would be a breeze.

But markets don’t move in one direction forever,right?

That is a fact,but it’s hard to see any forces that could turn things around. Everyone is talking about HUL’s $5 billion due to come in shortly. Then,there’s the possibility (hope?) that the NFP number is very bad,which could certainly trigger a rush out of US assets; however,it’s hard to see that money aiming at India. And finally,everybody (who can be) is long dollars,so any trigger—say,HUL—could result in a 2 or 3 rupee rally.

But don’t hold your breath. All you can really do is pray that the government takes the deregulation and process change bull by the horns,recognising that a crisis is a terrible thing to waste.

The author is CEO of Mecklai Financial

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