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Rupee stays rangebound: How to trade in USDINR?
Publish date: 6th August, 2018
It has been nearly 6 weeks now, USDINR has been caught oscillating between 68.20/25 and 69.00 on spot. A bulk of that trading has been within an even narrower range of 68.35/40 and 68.80 on spot. RBI is happy shooting down any intruders above 68.80 but at the same time, speculators are keen on buying Dollars closer to the lower zone of the range.
There are two choices in front of the trader when the market becomes so choppy. The first choice, do nothing till it ranges but be quick to participate once the first sign of trend emerges (if you exercise this choice, you will be unpopular with your broker, though it can save you emotional/financial capital). The second choice is to act. If you decided on the latter, then read on. There are three ways to participate in the market:
- Wait for USDINR to travel to range extremes, i.e, buy when it settles between 68.25/30 on spot or closer and sell when it travels towards 68.90/69.00 on spot or closer. Stops need to be placed below the support zone and above the resistance zone. Beware of false breakaway moves.
- If you can not wait for range extremes, then search for a new 1 Rupee coin. Then, balance in between your index finger and thumb finger. Then, take a deep breath and flip it in the air. Heads you buy, tails you sell.
- One can even think of shorting market neutral options structures like straddle and strangles, on August series on NSE/BSE, and collect the premium. A risk to the trade is if USDINR breaks out of the range, then you can suffer losses and you also have to be quick to exit it, as otherwise, losses can multiply. As long as the range survives, you are going to make money on such structures.
On Friday, PBOC came down heavily on short sellers as they hiked margin on Forward trades from 0% to 20%. Contrary to market opinion, we have long argued that China is not in a position to use weak currency as a weapon. The Chinese economy is dangerously leveraged and poorly imbalanced due to lack of domestic consumption engine. A weak currency would do harm than good, as it can trigger more outflows, which in turn can undermine the Chinese financial system. A weak currency would harm the household sector and therefore make the consumption engine even weaker, something the Chinese policymakers do not want. Hence, we can say China is caught between a rock and a hard place in the currency. Damn if they act, doomed if they do not.
By: Anindya Banerjee, Head of Research-Currency Derivatives
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