I am willing to admit I am rather a big Macro kind of person even during trading and as most are, the Rupee’s upside is indeed limited by the size of the market it plays. While the Aussie does not want to and yet makes stronger against the Dollar, the dollar itself wantonly strengthens contrary to tis economy’s weakness because of the “Flow to safety” trade and because of the large foreign holdings of Treasuries not unlike the yen ( that story in the later paragraphs, do read thru for it will also play out) thus a weak Friday Jobs report for the first week of July meant that the weakness of data actually was expected to and did make the Dollar stronger and later bring it to the brink of a deflationary scenario.
It does not need to be the Dollar to affect such an inverse transaction as Yen has suffered for years on end and the Euro and the Pound Sterling carry a similar risk. On the Indian side however, the comparatively lower Dollar value of trades in the currency similarly preclude the rupee from having any upside advantage and as it gets stuck on the Euro’s downside its inverse transaction riding the Dollar Index is much more than other currencies.
Other trading economies of Asia including the pass thru trading economy of Singapre, similarily suffered but the Won and the SGD benefit from the larger share of Dollar transactions and build out a better case for strength in the currency and thus domestic inflation and interest rate management with slightly weaker equities as witnessed in Korea when Samsung results took the equities down but the Won managed.
Speculative flows make the Rupee’s comeback from 56 levels tougher as witnessed in sharp comebacks pegged to the Dollar Index (DXY) on Friday. However if there is strength and institutions are willing to trade it to 54 and lower on the “upside” nothing can stop it from happening as flow traders would ride that move equally.
Similarily a global weakness in commodities would help other Asian currencies including Indonesia as the Sell Indonesia buy India trade probably winds down if the Rupee remains weak in the face of weaker commodity demand from lower global trade demand for commodities Oil and Gold controls will therefore only help the Rupee gain back ground rather than fixatiing on government support from $289B in Forex reserves.
At certain points in the climb though Rupee does acknowledge the weakness of the Euro and that could be material in bringing the rupee to competitive levels and win back benefits from the falling commodities price cycle that begins with the Dollar Index poised to hit 90.
- Rupee below 55-level; falls over 1 per cent against dollar (profit.ndtv.com)
- India Morning Report: Nooo! Nah! Nichts! Its not time for that correction (awardz.wordpress.com)
- Rupee gains 25 paise against dollar (news.in.msn.com)
- Rupee Impact: Why the Euro can’t fall enough for the Rupee (awardz.wordpress.com)