This article is Part 1 of a series.
India
More than 80 cities and districts across the country have been placed under stringent lockdown after cases of coronavirus were detected there.
All districts of the national capital New Delhi will be locked down. The government of the state of Maharashtra, home to India’s financial hub Mumbai, asked all non-essential businesses to close through March 31
The lockdown risks worsening an economy that’s already set to grow at the slowest pace in 11 years.
India’s rupee weakened to an all-time low last week and stocks got hammered as the global financial markets continued to meltdown.
“Hot money” is leaving. Foreigners have pulled a combined $10 billion from Indian shares and debt so far this month. This is the biggest withdrawal since the U.S. taper tantrum of 2013.
What is “Hot Money”?
The U.S. dollar inflows into financial markets are often called ‘hot money” because they get in and get out very quickly (potentially leading to market instability).
“Hot money” is the flow of funds (or capital) from one country to another
When the U.S. dollar inflows come, the currency of the receiving country generally appreciates and gives a feeling of safety and security from any external shocks. However, when the outflow happens, the currency depreciates in rapid fashion, leaving the country in a vulnerable situation.
Supposedly, the Reserve Bank of India has begun using its record foreign reserves (
$480B) to try and stem the rupee’s decline. (It’s selling its stash of U.S. dollars and buying rupees.)
Due to the uncertainty of how the coronavirus pandemic will affect India, it’s anybody’s guess on what the central bank can do to alleviate concerns and convince the “hot money” to stay.
If the Reserve Bank of India can’t, there could be a massive outflow, and the value of Indian rupee against the US dollar would plummet.
If we take a look at the weekly (1W) chart, the USD/INR has tried to stay around 70between 68.50 and 72
But in March, USD/INR broke through 72 and quickly rose to 76.
In less than a month, it’s jumped 400 pips
So for two years, USD/INR had moved within a tight 350-pip range, but now, in less than a month, it’s moved over 400 pips already. 😱
The turmoil in the global financial markets of the US, Europe, and Asia are creating trouble as foreign investors are leaving en mass.
The coronavirus cases have yet to stabilize in Italy and Spain while the UK and US are seeing an exponential rise in cases.
With so much uncertainty, I think the demand for the U.S. dollar will continue and I expect the Indian rupee to further depreciate.
On the daily (1D) chart, we can see clearly how price was capped at the 72.00 level until….all hell broke loose in the currency markets.
It then spiked above 76.0075.00.
Today, price is back above 76.00
So where to enter long?
I see two places for an entry.
- One can enter long at market
- Or wait for a pullback and enter long when price retreats to 74.00.
The risk with the first option is that the Reserve Bank of India might intervene and push price back down.
The risk with the second option is that price may not fall back down to that level and you miss out.
I’m going to size small and enter at market.
My stop loss (SL) will be 71.00
Looking for a profit target (PT) is tricky.
If we zoom out and look at a monthly (1M) chart, we can see that USD/INR is hitting all-time highs and there are no previous resistance levels!
So how high could the price go?
It’s hard to say.
But I think it really depends on how much rupee depreciation that India’s central bank can stomach before it either A) takes more aggressive measures to slow the depreciation or B) throws up its hands and gives up….allowing the rupee to fall where it may.
We can look for potential clues for what’s possible. In 2013, from May to August, USD/INR went up about 1,600 pips.
So if we’re just at the start of a massive upside breakout, and we’re starting at 72.00
Can it really go that high?
I will target 82.00
If price gets to 80.00
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
Read more about this trade idea's development over time.