The Chinese Currency Depreciation and economic concerns have a ripple effect on Asian currencies, resulting in an upward drift for USDINR amidst growing uncertainties in the market.
Date- May 31, 2023
Place- New Delhi, India
The recent depreciation of the Chinese currency, USCNH, has created pressure on various Asian currencies, including the Indian Rupee (INR). The price of USCNH has reached its highest point since November of last year, reflecting the unfavorable news emerging from China. The Chinese economy is facing challenges, with a growing unemployment rate and a slowdown in economic growth. One of the key issues lies in China’s heavy reliance on external demand and investment in real estate and infrastructure, as the country lacks a robust internal consumption engine.
This heavy dependence on external factors has led to the formation of a massive debt bubble and stressed the balance sheets of regional governments in China. Following the Global Financial Crisis (GFC) and the European sovereign debt crisis between 2008 and 2012, the Chinese central government resorted to accumulating debt through regional governments and their Special Purpose Vehicles (SPVs). This strategy was aimed at presenting a more favorable financial picture for the central government.
However, there are limits to the effectiveness of such financial engineering techniques. China now faces a crucial decision on whether to return to its previous practices of utilizing debt to stimulate infrastructure and housing development, thereby expanding the debt bubble, or to opt for temporary and modest economic measures that may not have the necessary strength to drive the colossal USD 18 trillion annual economies forward.
Traders involved in USDINR (US Dollar to Indian Rupee) must closely monitor both the US Dollar Index and the Chinese currency. In recent trading sessions, the US Dollar Index has remained unchanged. However, if the USDCNH continues to climb, it could exert upward pressure on the USDINR exchange rate. At present, USDINR encounters significant resistance levels near 82.90/83.00, while finding support around 82.50 and 82.60. The bias for USDINR remains upward, although substantial central bank intervention is anticipated at higher levels, which could help keep overall volatility in check.
The implied volatility for USD INR is currently trading at a relatively low level. Consequently, there is considerable demand from investors to engage in short straddles and strangles. However, it is crucial to exercise caution and manage risks effectively by limiting position sizes and employing risk management strategies like stop-loss orders or position adjustments, particularly in the event of significant movements in spot USDINR prices.
Moving on to GBPINR (British Pound to Indian Rupee), the bias is range-bound with a projected range of 102.35-102.85. The decline in GBPUSD (British Pound to US Dollar) can be attributed to prevailing risk-off sentiments. GBPINR is experiencing a lack of momentum due to the USDINR’s stagnation. When USDINR remains flat, GBPINR tends to act as a proxy for GBPUSD movements. Investors are advised to closely monitor GBPINR options on the National Stock Exchange (NSE), as the volume of these options is increasing. Options are considered a preferable choice for trading higher-volatility currency pairs like GBPINR compared to futures contracts.
However, it is prudent to adopt lower positions than usual. GBPUSD has strong support levels in the vicinity of 1.2350/70, while on the futures market, GBPINR finds support near the 102.10/20 zone, with resistance expected around the 102.90/103.00 levels.
Shifting focus to EURINR (Euro to Indian Rupee), the bias remains downward with a projected range of 88.45-88.95. The selling pressure on EURUSD (Euro to US Dollar) driven by risk-off sentiment is likely to impact EURINR as well. While USDINR may offer some support, further losses in EURUSD could result in a decline in EURINR. Key support and resistance levels for EURUSD are currently situated around 1.0630 and 1.0650, respectively.
On the futures market, EURINR is expected to find support near the 88.50 and 88.20 levels, with resistance levels near 89.10 and 89.15. Consequently, the overall bias for EURINR remains downward.
Regarding JPYINR (Japanese Yen to Indian Rupee), the bias is range-bound with a projected range of 59.35-59.75. Masato Kanda, Japan’s top currency official, recently issued a warning against unchecked depreciation of the Japanese Yen (JPY). In response to his comments, JPYINR has recovered from levels around 59.10/20 and is currently trading near 59.55 on June futures. As a result, a range-bound trading pattern is expected for JPYINR.
In conclusion, the Chinese Currency Depreciation and the ongoing economic concerns surrounding China’s external dependence have impacted Asian currencies, including the Indian Rupee. USDINR faces an upward drift due to the pressure exerted by the US Dollar Index and the Chinese currency. GBPINR remains range-bound, acting as a stand-in for GBPUSD during periods of USDINR stagnation.
EURINR experiences a downward bias influenced by the selling pressure on EURUSD. JPYINR is expected to exhibit a range-bound play following a warning against excessive yen depreciation. Traders in these currency pairs must remain vigilant and employ appropriate risk management strategies to navigate the current market conditions effectively.
Disclaimer: Information provided by CurrencyVeda is for educational purposes only, not financial advice. Conduct your own research and consult professionals before making investment decisions. Currency markets are subject to risks, including currency fluctuations. CurrencyVeda is not responsible for any losses or damages resulting from reliance on the provided information. Trade and invest at your own discretion and risk.