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| The emerging forex indicators | | GUEST COLUMN |
| Mukul Pal / Mumbai Jan 12, 2009, 00:49 IST |
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The worries of a rupee collapse along with equity are mistimed. Expect the Indian currency to strengthen going forward.
The frantic call index has spiked again, as the number of Forex queries has suddenly shot up at Orpheus. And, as always, the queries poured in from multiple regions. We have had queries from India and a few from Europe. It all seems to have a kind of inflexion psychology linked more to an emerging forex collapse. One member said, “If the currency crashes, foreigners will desert the country, complicating matters.”
These worries take on a different tone regionally. The Indian concern seems to stem more from equity side. If equity collapse is here and large blue chips are going bankrupt and are delisted, the currency is definitely going to take a hit as confidence in the country decreases.
On one hand we do concur with the reasons highlighted, but on the other the issue of timing is totally out of sync. Equity market collapse and currency collapse generally happen together, as we have detailed on prior occasions. The equity collapse is more than 15 months old in many emerging markets, more than 12 months in India. The currency collapses also took a similar time.
So the worries are mistimed and a year late. They also come at a time when mass psychology gains momentum and starts to shift to the other extreme. For us at Orpheus the structural economic problems still lie more on the developed economies front and not in the regions with the emerging forex. This is the reason why thinking about an emerging collapse is premature.
Click to view chart
The current sentiment reminds us of the view against dollar when doubts were being raised regarding its strength and sustainability of the trend. The surprise element was strong is what we had indicated in the ‘The dollar and asset price movements’ article (September 1) last year. In it we said, “Though immediate targets for dollar lie near 1.45 levels (EUR-USD), we are anticipating a multi-month of strengthening back to January 2005 levels of sub-1.4.” This was at 1.47 levels. Prices fell to a low of 1.23 levels and are now ruling near 1.35.
What happens to dollar from here should tell us a lot about the world economy, about commodities, about global equities etc. Coming from an alternative research thought process that assets are linked with performance cycles and performance and underperformance itself is cyclical, one can even look at the Indian rupee, Romanian lei, Hungarian forint, the Croatian kuna and other emerging forex pairs to understand how much low we are going to go on emerging equity before the multi-month bounce on depressed assets start.
We feel emerging market forex leads the world equity markets and depressed historical lows on the Indian rupee could not have come at a better time for a turnaround. The negativity linked with job losses, accounting frauds, metals collapse, billionaire suicides and governor impeachment suggest a sentiment extreme to us. One should also keep in mind that accounting frauds don’t generally get detected at market tops, but at market bottoms, when inefficiencies really show.
On the other hand, there are potential scenarios for dollar to see a retest of previous levels near 1.23, and maybe push till parity. But it’s the time factor that challenges further dollar strengthening beyond Q1, 2009. Moreover, Oil seems to have turned up, Gold is nearing a bottom any time in the next few weeks and Kitchen cycle lows on global equity seem to be in place.
Dollar should be nearing a large reversal for the next four years. Dollar 2012 at 1.85 is what we are looking at. The rupee back at 38 and dramatic strengthening back on other emerging pairs also pushes us towards the contrarian zone. But the rupee topping and reversal is what we see. We may be wrong and will review when needed.
Making peace with loss is a tough task. This is why more than financial planners we need psychiatrists. Whether Raju’s frank statement robs Satyam of the Golden Peacock award and the Nifty of a blue chip and us of a potential long-short pair, he was faster to admit the disaster than Rod Blagojevich, who preferred gambling on the impeachment risk. Human beings are loss averse.
We prefer carrying on with losers than accepting that we failed or made a mistake. And timing is an error we as humans continue to do. It’s a matter of choice. We should either choose to admit that we don’t know how to time or we should continue to carry the losers and regret.
The author is CEO, Or-phe-us Capital, a global alternative research firm
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