Rupee charts in uncharted territory

By Saikat Chatterjee and Subhadip Sircar

MUMBAI/HONG KONG (Reuters) - The rupee has fallen so far so fast that not even technical analysts can divine the currency's future.

The chartists, as these analysts are also known, are struggling to make sense of a currency that is now firmly in territory that is uncharted.

Strategists said that technical factors did not count for much in crisis situations in which investors were fleeing markets and the fact that the rupee was at record low levels compounded the problem because making comparisons with past price patterns was impossible.

The rupee has consistently fallen below all reasonable technical targets since breaking its then record low of 57.32 to the dollar on June 10. The rupee is now at 66.55 and heading towards 70.00.

"Some say the next would be 70, while others say 75. But I don't see any specific target. It is almost impossible to set a technical target as the rupee hits all-time lows every day," said a non-deliverable forward (NDF) trader at a European bank in Singapore.

Saktiandi Supaat, head of FX research at Maybank in Singapore agreed.

"It looks like the rupee is in a new uncharted territory. A next key level is 70.00, but the 70.00 is just a psychological level (not a technical one)."

With technical analysis not offering much guidance, investors are looking even more closely at forwards and futures markets, which can be an excellent gauge of price expectations.

These markets suggest the rupee - despite being down 18 percent against the dollar this year and recently hitting a record low of 68.85 - could fall further yet.

There are both onshore forwards and futures markets and offshore NDF markets for the rupee, with trade in the latter taking place in Singapore, Hong Kong, New York and London, unfettered by Indian central bank regulations that control the onshore market.

Rates in the onshore futures market have the rupee at 67.06 in one-month, versus a spot rate of 66.55. Three-month rates are quoted at 68.40, six-month at 69.24 and 12-month at 70.80.

Quotes in the offshore NDF market are also bearish. One-month rupee NDFs are trading at 67.49, while the three-month is at 68.74, the six-month at 70.05 and the 12-month at 72.34.

The difference between the onshore and offshore quotes reflects the different players that are active in each market. While traditionally the NDF market has been the home of offshore speculators - and still is given the pressure the rupee is under - it is also home to genuine hedging now that so many restrictions have been imposed onshore.

Regulators have taken steps to reduce arbitrage opportunities between the onshore and offshore markets because they believe that speculation in these markets puts pressure on the spot rate.

The NDF market has influenced India's foreign exchange market but more so has influenced volatility, outgoing Reserve Bank of India governor Duvvuri Subbarao said after his monetary policy review on July 30. "It will be a better world for us if there is no NDF market, but we cannot wish it away."

Onshore spot traders in Mumbai agree, saying that the severe bearish bets against the rupee in the offshore markets had a negative impact on the rupee's opening trades on days when other Asian currencies were relatively stable.

"We are seeing the NDF markets having a big impact on the rupee's fortunes during the current bout of depreciation. It is complicating the RBI's rupee defence as it does not have any regulatory purview over the market," said Subramanian Sharma, director at Greenback Forex.

The RBI has tried to make speculating on the rupee expensive. Among a wide range of measures the most acute has been to raise short-term interest rates, which have spiked by almost 300 basis points, roiling bond markets and raising the cost of funds for banks and companies looking to short the rupee - as well as inducing a rupee credit squeeze.

These measures have certainly reduced currency futures volumes, which traders estimate have plummeted to an average $2-$3 billion a day from as much as $7 billion before the measures were put in place.

What they have not done, however, is stop the rupee falling.

"Frankly, you can throw a dart on where dollar/rupee is going to be next. Unless there is a clear resolve from the authorities on the currency front, there is potential for more downside," said a trader.

While the forwards and futures markets offer some bearish views, their quotes are positively sober compared to some of the bets being laid in offshore foreign exchange options markets.

A currency trader at a European bank in Hong Kong said many dollar options against the rupee had been bought around the 80 level with implied volatility on rupee options above 20 percent for the first time in almost a decade. Wide volatility bands are closely associated with depreciation.

India's twin fiscal and current account deficits are putting the rupee under pressure, problems that have been exacerbated by expectations that the U.S. Federal Reserve will begin reducing its monetary stimulus measures soon, prompting many investors to withdraw from emerging markets.

While some analysts think the rupee's depreciation is overdone, the currency market is not the only market where investors are laying negative bets against the country's fortunes. They are also doing so in the credit markets.

Net notional volumes in State Bank of India credit default swaps, which investors use as a proxy for the Indian sovereign, have jumped by a fifth since the start of the year to $850 million, according to DTCC data on Thomson Reuters CreditViews.

The spread on the five-year CDS contract, meanwhile, has blown out to 355 basis points since mid-May.

(Additional reporting by Jong Woo Cheong; Writing by Nachum Kaplan; Editing by Neil Fullick)