Wednesday, January 20, 2010

Market Outlook


Dollar - Rupee




The rupee’s resurgent rise in the New Year came as a nasty surprise given the overall dollar bullish undertone overseas – it’s breach below 45.80 - 46 is indeed an important development as we sit to reassess the trajectory of the rupee going forward.

As one may notice in the chart, price has been forming newer lows (purple line), as it remained well below the falling trendline (black line). So long as the purple line stays below the black falling trendline, any strength in the dollar would meet with selling pressures.

However, any rally from here that stages a convincing breach above the falling trendline (now at 47.10) would spell an important alert – that of a reversal in the falling trend of the dollar. And in such a case the dollar would rise to nothing less than a 49.00

But so long as the purple line (price) keeps holding below the trendline, it would be prudent from a risk management perspective to sell upon rises. In other words, if the dollar does not cross the first horizontal dotted line (at 47), it open’s the possibility of a test of the third dotted horizontal line, namely 44.10.

So given these contrasting possibilities, it may seem pretty much a Catch 22 scenario of “Doomed if I sell, and Damned if I Don’t”…..

My sense is that we could play safe for the medium term by resorting to aggressive hedging upto say August –Sept 2010 to guard ourselves against the risk of a 44. Beyond August – Sept 2010, hedges could get concentrated in the plain vanila space for the simple reason of minimizing adverse MTM’s and participating in any dollar strength that may materialize as the year progresses. Because given the timeframe, namely between now and August 2010, one cannot rule out a massive comeback in the dollar either.

My personal view is that rupee’s strength could be limited to the near to medium term and after a possible move towards 44 or below, a sharp rise (like that seen in 2005 and 2007 ) in the dollar could materialize that could take the dollar back to 48.60 - 49 again. Conservatively speaking, the likely range of the rupee in 2010 could be 43 to 49.50.



DOW JONES



At the risk of sounding like a broken record, I believe that the recovery staged by the Dow Jones Industrial average may be close its end and that the fundamental trend of the DOW is still down.

As the index approaches a key Fibonacci retracement level as shown by the blue horizontal line, the US markets may be in what can be called an “ exhaustion rally ” - one that typically precedes major turns.

Key bearish divergences – in MACD and RSI are playing out – as can be seen, with every new high made by the DOW, the indicators – ( MACD & RSI ) aren’t making corresponding new highs.


If one were to trace the rally that started off in March 2009 in the markets, the economy has started showing signs of recovery now ( after nearly a 9 month lag ). If the above view of a bearish DOW materializes, then the US economy in the next 9 to 10 months is likely to be slower than what it is now.

It may be worthwhile to keep our revenues from US clients covered through a credit risk cover just to be guarded against a worse case scenario of bankruptcies and defaults.

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