The rupee scare

Scare is an emotional need
Like we need soap operas, we need things to be scared of. Emotions are why we live, so if we don’t have greed and fear, we might not feel alive. This is true with markets. How we interpret indicators (a currency) could also be linked with how psychological we want them to be. Robert Prechter would agree since he believes that social mood drives markets. This should mean even macroeconomic indicators or currency value could be driven by social mood. And, if a 60 rupee-dollar value does not scare us enough markets weakness could continue and vice versa. There is only one problem here: psychology is prone to reversal, after greed comes fear, and then the cycle repeats. So, if you think the rupee has scared us enough, the reversal is round the corner. It might all sound too simple. Actually, markets are very simple. “Simplicity is the more undermined investment technique,” said Garfield Drew.

Indicator as a system
Coming back to the currency. A currency is supposed to be a macroeconomic indicator, which is a true reflection of the economy. How good is this true measurement? We have been taught as technicians that a currency has an inter-market relationship with the local equity benchmark. The currency strengthens the equity benchmark moves higher and vice versa. Ok! It works up to a certain extent. You can see that visually. But are visuals enough? We have doubts about visuals being enough for risk management.

Refining the indicator
So, if your view on the rupee does not give you allocation confidence to put money on or against it, you should stop being scared. If you are not sure how weak is weak and how strong is strong and how's that going to affect your stock market portfolio, vacations or salaries in the long run, why don't you refine the indicator or its interpretation? Ok, we understand there are simply too many variables to understand, comprehend, quantify and anticipate a currency movement. So, building a rupee system and believing in it needs more than science, it needs risk management.

Technician’s perspective
Just like the rupee, there are other emerging market currencies, with a similar price structure. The Romanian Leu has a similar price structure like to the rupee. The Leu structure has a smaller degree compared to rupee-dollar, which is in a decade long sideways price structure. As technicians, we are trained to study price structures. There are more than a few reasons why the current leu and rupee structures are counter trend and not a trend. First; trends are clear and non-overlapping. This is not the case for the rupee. Second; when a real trend begins momentum backs it. Momentum is also missing from the rupee. Third, 60 is a stronger psychological anchor. Markets need psychological anchors and psychological anchors create more news. Fourth; Equities seasonally go through a weak period from April to November (Yale Hirsch Cycle). Negative or sideways equities could also translate to a weaker rupee during this period. Fifth; the very fact that there is no net fall in equities suggests we are still in a consolidation rather than a secular distribution on equities and secular weakness on the rupee. We continue to hold our Nifty 8,000 view and a case for a reversal from current levels on the rupee.

A simple system
We took the seven top currencies versus the dollar and looked at their indexed quarterly performance. Guess what we found? Among the top global currencies, including the yen, the rupee was the weakest having lost around 20 per cent in three years. For us, this is a simple system which tells us the rupee is the worst outlier. Because we don’t assume a bankrupt state, this outlier should revert. When it does, the stories will change. We think it should happen now from 60, rather than 70.

The author is CMT, and Founder, Orpheus CAPITALS, a global alternative research firm