Category: Currencies

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Currencies

An equation for the Indian Rupee

The USD INR relationship for the last 20 years is as shown below:

 

 

The last 4 years has been extremely volatile due to the global crisis and the response of the Central Banks to it.

At this particular juncture, the Indian rupee looks very vunerable due to the following reasons:

1.Current Account Deficit:India’s Current Account Deficit for Oct-Dec 2011 nearly doubled from 10.1 Billion $ to 19.6 Billion $ (source:WSJ)

2.This has resulted in a falling of reserves by around 15 Billion $.The trade-based indicator of reserve adequacy viz. import cover of reserves reached a peak of 16.9 months of imports at the end of March 2004. At the end of September 2010, the import cover stood at 10.3 months. (source:ProjectMonitor)

3.Despite the recent CRR cut, the liquidity is extremely tight.(source:RBI) .Banks are borrowing close to 2Billion $ daily from the repo markets. RBI intervention in the currency markets will further worsen  the liquidity situation

4.Flows to the capital markets is adversely affected owing to the GAAR news in the recent budget.In the month of April 2012 so far, FIIs have invested only 36.76 Million $ !! (source SEBI)

5.The entire country is expecting a rate cut.Even though inflation figures remain elevated, the RBI governor is likely to cut rates

6.The Govt’s fiscal deficit will worsen over the year.The Food Security Bill , political compulsions and failure to meet its ambitious disinvestment targets (30000 Crores) will ensure that.

7.Geopolitical shocks such as Iran-Israel war and/or reigniting of the Euro crisis will be huge negatives for India

So the equation is:

Wide Current Account Deficit+Falling Reserves+Tight Liquidity+Weak Capital Inflows+Monetary easing+Worsening Fiscal Deficit+Geopolitical Shocks=Weak Indian Rupee

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Currencies

A Rip Van Winkle trade

In an earlier post, we had discussed Rip Van Winkle trades wherein you put on a trade and forget about it for the next 20 years.

While stocks,realty  etc may be some of the investment classes for such trades, even currencies can be a fertile area for Rip Van Winkle trades.

Take for instance, the historical data of USD and the Pakistani Rupee (PKR) for the last twenty years

One would have made 4x just holding onto this trade .Considering the huge leverage one could employ in the forex markets, the returns could have been much much higher

Does this trade still hold?Considering the country’s dire economic straits, radicalization of its people,the immense incompetence of its political leadership  the imminent withdrawal of US from Afghanistan and drying up of western aid, it is fairly clear that the Pakistani Rupee will head lower with time.

So the right thing to do is to sell PKR and buy USD and keep rolling the positions for the next twenty years.

 

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Currencies

Fortunes of War

In an earlier post, had discussed the consequences of Israel attacking Iran.

In most wars, the biggest beneficiary is the one who has not taken part in the war

For example, the biggest winner in the Korean War and the Vietnam War was Japan as the US military used it as a base for their operations

In the US-Afghanistan war, the biggest monetary winner was Pakistan as the NATO supply lines went thru its territory.

In the Iraq war, the biggest winner was Dubai.No wonder it saw a huge boom during that period.

So if the Iran-Israel war breaks out, the country not taking part in the war will be the biggest beneficiary.In my opinion, that country will be…Saudi Arabia.It will benefit by a weakened Iran and/or a weakened Israel and the best part will be that oil prices will remain elevated.

So its probably time to stock up on some Saudi Arabian Riyals !