INR AT 30

Any up leg on Indian Rupee should not push above 53 after which the currency should fall to 30. The weakness till 53 should not extend beyond the OCT – NOV seasonally low periods for equity. The 30 leg should last atleast till late 2010. Despite the large Rupee strengthening we are still not ruling out a few negative months on Indian Equity.
Before we start explaining how we reach this figure we would like to speak a bit about headlines and sentiment indices. There are not many sentiment (survey) indices in India. We run a few for other emerging markets and want to replicate the same for India. Ed are you listening?
A sentiment indicator has a very simple working. It calculates % bulls. If there are 70% bulls the best of the market strength is already behind us and vice versa. Just like other price or volatility based indices, survey based indices work best at extreme values. In the absentee of survey indices we use statistical indicators to understand the market skew.
There is another thing we did. Open source has its mysticism and Google applications are leveraging on it well. We looked at the headlines on Indian Rupee from 31 Dec till the recent equity high in equity in May. Now one may ask why did you look at equity high when you are studying the Rupee. More than half of the stories on Indian Rupee directly quote local stock markets, Asian stock markets or global equity as reasons behind the movement of rupee.
We classified the news into two parts. One from Jan till Mar equity lows and then from mar equity lows till May equity highs. This is the chronology of some recent news on forex. 31 Dec 08, Rupee posts biggest yearly fall since early 90’s (-19.1%). 07 Jan, Rupee drops as shares fall on Satyam. 09 Jan, Rupee up as banks sell dollars, inflation falls. 15 Jan, Rupee eases as stocks seen lower. 16 Jan, Rupee to start higher as Asian stocks up. 19 Jan, Rupee trims gains on seesawing stocks. 20 Jan, Rupee weakens on Asian moves. 21 Jan, Rupee at 1 month lows on outflow worries. 22 Jan, Rupee erases early gains as Oil cos buy dollars. 29 Jan, Rupee mostly steady amid mixed cues. 02 Feb, Rupee Weaker on drop in. shares; stronger dollar. 12 Feb, Rupee opens down as asian shares fall. 16 Feb, Rupee to tread water, await budget. 18 Feb, Rupee to drop in grim global outlook. 18 Feb, Rupee pares losses as stocks rise 1%. 23 Feb, Re may take cue from equity market. 24 Feb, Rupee weakens on S&P’s outlook downgrade. 25 Feb,  S&P outlook downgrade may hurt rupee – Morgan Stanley. 01 Mar, Rupee drops to record low on import payment. 02 Mar, Sliding Re triggers fears of FII. selling. 03 Mar, Rupee may hit 56 a dollar in 3 months: Barclays.
What does this tell us? This tells us that most of the news from 31 Dec was drifting under the previous rupee trend of weakness for nearly 12 months. Most institutional calls from HSBC and Barclays during that period were about further weakness till 50 or 56. The recommendations were in a narrow band. Price was at 48 and the recommendation for 50. Behavioral finance talks about two kinds of analyst recommendations, either in a narrow band or a very large band (Orpheus call of INR 30). This means either overconfident or under confident but rarely well calibrated.
What happened from 03 Mar when Barclays gave the 56 call, The rupee started strengthening till May high. This was the news which was reported on 11 May, “Rupee at 3 month highs on overseas dollar losses”. This means that news did not much value addition and was in fact trailing the asset price. We also checked the Google trends for Rupee and Sensex. Both the assets spiked together first in Oct 2008 and then in May 2009. Searches on Google were related to negative news in Oct 2008 and positive news in May 2009, no wonder the contrarians made money buying in Oct and are not in loss yet selling at May highs. Owing to more information generated by Dow and Dollar, Google trend even generates data on searches like “Strong Dollar” or “Weak Dollar”. Interesting how what the world searches create a sentiment index for the same asset prices.
“Simplicity remains the most undermined investment approach”, This statement of Garfield Drew keeps shocking us every time we realize that things are indeed very simple and our task as alternative researchers involve simplifying things rather than otherwise. A simple 200 day moving average model gave a buy signal (weakness signal) on 19 Feb 2008 which continued to run till 05 May 2009 resulting in a 25% rise from 39 to 49. A no nonsense indicator is tough to believe. A majority of investors will prefer digging in tomes, but not use a simple average, because something so simple can’t be effective.
The view till INR 30 can be explained through TIME CYCLES. There is a 3.3 year Kitchin cycle on Indian Rupee also, which started in Jan 2008 and can end anytime between Jun 2010 and Jan 2011. According to this cycle INR should have either topped in Jun 2009 or can at best extend till Oct 2009. Even using Elliott Fractals, the move on INR can be seen as a large three legged A-B-C Expanded Flat corrective which is finishing the second B leg after which the fast moving down leg should begin. Let’s see.
ORPHEUS RESEARCH AT REUTERS – UNITED KINGDOM
ORPHEUS RESEARCH AT REUTERS – USA
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