Chasing the tiger

Last month the Dubai Gold and Commodities Exchange (DGCX) hit a new intraday record for the number of Indian rupee/US dollar future contracts traded in a single day. 1,074 contracts worth $47.37 million [Dh174m] were traded on the exchange in a single day – the highest value and volume achieved since the contract was launched in 2007.

This large surge in volume of the INR/USD contract is in large part due to the stellar performance of the Indian currency this year, as the pair's bullish moves in 2010 seems to have tapped a new found pool of interest by market participants who want a piece of the rupee's shining run.

Since the start of 2010, the INR has appreciated close to 5.16 per cent against the greenback. This makes it one of the best performing Asian currencies this year behind only the Malaysian ringgit (5.8 per cent), and dwarfing the performance of the Indonesian rupiah (3.98 per cent), Taiwanese dollar (1.34 per cent), and South Korean won (3.18 per cent). The year-to-date gain of the INR isn't too shabby when compared to the performance of other asset classes either; the Dow has gained 5.5 per cent this year, gold is up 4.76 per cent, copper is 5.39 per cent higher, and crude up 2.38 per cent.

On April 12, the INR hit a high of 44.1875, a level not seen September 2008 when USD/INR was on its slide towards 50 levels. The pair hit a low of 52.18 in March 2009 and since then, the pair has bounced back and shed more than 15.31 per cent in 13 months.

Surely such a performance will catch the eye of speculative investors looking to ride the trend along with those institutional investors looking to hedge their physical INR exposures, particularly when it comes to making payouts to their European and US counterparts.

So the question begs to be asked, where do we go from here? Technicals indicate that this upward price action of the rupee experienced so far should continue through the remainder of 2010. At the time of writing, the pair was hovering dangerously close to the 44.1421 level, which represents the 61.8 per cent Fibonacci retracement level from its March 3 low of 52.18.

A comprehensive breakthrough 44.00-44.1421 levels could further buoy the pair to test a full 76.4 per cent retracement at 42.2432 levels. Fundamentally, these levels between 42.00-42.2432 don't look too farfetched either, as a number of different macroeconomic factors (both at home and away) should support the INR in its march to 42.00 levels.

Starting closer to home, the strong economic growth prospects of the Asian Tiger nation sure do paint a bright future outlook for the currency as well as the economy. Despite the global recession which has kept growth muted across some of the world's larger economies, the Indian economy expanded six per cent over the last year and expectations are for a further expansion to 8.2 per cent for the current fiscal year. So robust has the growth been that the Asian Tiger has already begun the process of tightening its monetary policy, joining nations such as Australia and China in a bid to keep their inflationary pressures in check.

The markets were caught by surprise when the Reserve Bank of India increased the benchmark reverse repurchase rate to 3.5 per cent from a record low 3.25 per cent last month, and with an expected headline inflation reading of 10 per cent due out on Thursday, the markets are pricing in another 25-basis point increase during this month's central bank's policy review meeting to be held on April 20.

Such a rate hike at this month's meeting will not only generate a wave of fresh foreign inflow, but more importantly, it will help the RBI move closer to their desired five to six per cent target inflation rate and will be largely supportive of further INR appreciation in the months to come.

The performance of the INR will also be largely tied to the performance of the Indian equity markets. Through the first four months of 2010, we have noticed a 55 per cent correlation between the Sensex and the Indian rupee. With the Sensex poised to retest and hold above the important 18,000 level in the days to come, the fundamentals (supported by FII inflows and the optimistic economic outlook of India described above) and technicals indicate that the Sensex could make a run to the 2008 highs in excess of 21,000 this year or beginning of next, which should further benefit the INR in its run towards 42 levels.

Further away from home, the US dollar's performance in the upcoming months will be a key factor in the INR's performance. With the recent bailout package agreed for Greece to the tune of €45 billion [Dh225bn], expectations are for a broad based build up of risk sentiment in the markets, which will result in investors fleeing safe haven assets such as the greenback in favour of higher yielding, more risky assets. As a result we expect currencies such as the INR to benefit as a result of dollar weakness.

Of course the risk appetite/risk averse theme could change with the Fed's proposed rate hikes coming towards the end of 2010, but perhaps India will have already seen its currency appreciate to 42.00 levels before the Fed begins its own policy tightening schedule. At that point, the greenback will had far to much ground to catch up in its chase of its Asian Tiger counterpart.

- The author heads the DGCX Futures and Options trading desk at ACM ME DMCC. The views expressed are his own

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