Posts Tagged ‘EM Currencies


Covered calls in USDINR

On Friday, USDINR closed at lowest levels in the last 2 years at 65.83. Intraday INR touched lows of 65.91. EM currencies across the board have been hit by Yuan devaluation last week. Coupled with prospect of US Fed rate hike in September, global markets are nervous about EM currencies. Lot of currencies like MYR (Malaysian Ringgit), ZAR (South African Rand) and RUB (Russian Ruble) have been hitting multi-year lows. MYR has gone below 1997-98 crisis levels. Few other currencies like Kazakhstan Tenge and Vietnam Dong have been competitively devalued. In Tenge case it has been allowed to free float from peg against USD. All Oil exporting economies are suffering hard with current levels of $ 40-45 per barrel.

Don’t know if these are signs of currency war but it might turn out to be so if CNY (Chinese Yuan) depreciates further. Recently RBI governor, Raghuram Rajan commented about CNY devaluation ( As per him maybe CNY devluation is not a concern at current levels but if it depreciates further it might be a cause of worry in future. INR has been an island of calm among EM currencies and is one of the out-performer till now. I had bought August and September series USDINR futures and sold 66 calls. Buying USDINR future means you are paying roll cost which during panic scenarios like the current one turns out to be 1 percent. This was my main concern while buying USDINR futures. This was the reason I had sold 66 calls, otherwise I would have carried naked future position.


Currency options USDINR: October series

September series for USDINR currency options expired yesterday. In my previous post, I had mentioned that I don’t expect Rupee to breach 56 in September series. All my sold OTM call options expired worthless.

But the biggest surprise of last series was UPA2 government awakening from slumber and its action on diesel price rise, FDI in retail and aviation. Frankly, I have been surprised positively  by bold measures announced by Congress led government. But one thing is pretty clear now, for short term (next 3 months), government action has removed tail risk of India’s sovereign credit rating downgrade. Sentiments have become positive and Rupee has moved sharply from 55+ levels to 53.5 in last 2 weeks. Indian Rupee being high beta EM currency has benefited from QE3. As usual some analysts have come out with ridiculous levels on rupee appreciation. Targets around 48-50 are being talked about. Same analysts had given Rupee targets of 60+ on downside when it was 56-57. It’s a clear case of overshooting on both downside and upside.

Today, the government will announce its borrowing plan for H2 (October-March) of this year. It will be an important cue in terms of Rupee pace of appreciation. In case market is disappointed then Rupee will find it tough to cross 53 on upside. On downside also, I think 55-55.50 should hold out in October series. Broad range for Rupee this series should be 52-55 unless some black swan event happens in Euro-zone. I think breach of 51.5-52 level would be difficult in this series. I have sold a lot of OTM calls for October series.


INR Outlook..

INR depreciated sharply in the last few weeks and INR spot even touched 49.88 intra-day. Lot of market players were caught off guard with this sharp down move. More than fundamental factors, sharp move had to do more with technical factors. Across the board there was EM currencies long unwinding. Importers and FII’s had unhedged positions in INR and this up-move led to panic among participants. Exporters had already sold off large part of their USD earnings at 45-46 levels, so there was no USD selling at higher levels. It took dollar selling by RBI at 49.8 levels to arrest the sharp slide. Although intervention by RBI was not large (closer to USD 500 m), but it had sentimental impact and Rupee recovered to 48.9 levels.

In the short-term, everything depends on Euro-zone resolution. INR is taking cues from Euro movement. I am not very optimistic on Euro zone resolution. It’s a case of economies having slow or zero growth with high debt levels. But once panic settles down, INR should provide good returns. I will slowly start building positions in Indian currency. If there is capitulation over Euro crises, Rupee can go below March 2009 lows of 52-53. It will be dream levels to go long into Indian currency. If there is capitulation, then commodities along with all asset classes will go down substantially. This will help bring down inflation concerns and pause by RBI, may be cut in interest rates later next year. This will build good case for Indian equities and INR in turn.

June 2019
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