Technical report

Key Technical Data

USD INR CMP USD INR 52 Week High USD INR 52 Week Low BSE Sensex CMP BSE Sensex 52 week High BSE Sensex 52 week Low 50.17 50.323 43.855 17362 20970 15745

November 10, 2011

US$ vs. Sensex inverse correlation

Rising US$ casts shadow over Indian equities
Exhibit 1: US dollar vs. Sensex weekly comparative line chart since 2006 till date

After a recent break-out, the US dollar INR pair is quoting at a 30 month high of 50.35 levels. The prevailing uncertainty in the financial markets worldwide following the Euro zone debt crisis has fuelled a surge in the US dollar, which remains the ultimate safe haven play during times of ambiguity, regardless of the nations own problems Further weakening of the Indian rupee could see the US dollar INR pair head towards the 2009 peak of 52 plus levels in the near term. This could spell trouble for Indian equities, which are inversely correlated to the greenback. A spiralling US dollar could derail the pullback in equities, which could go into a tailspin and re-test the recent lows in the near term

Source: Bloomberg, ICICIdirect.com Research

Outlook
After a recent break-out, the US dollar INR pair is quoting at a 30-month high of 50.17 levels. The prevailing uncertainty in the financial markets worldwide following the Euro zone debt crisis has fuelled a surge in the US dollar, which remains the ultimate safe haven play during times of ambiguity, regardless of the nations own problems. Further weakening of the Indian rupee could see the US dollar INR pair head towards the 2009 peak of 52 plus levels in the near term. This could spell trouble for Indian equities, which are inversely correlated to the greenback. A spiralling US dollar would derail the pullback in equities, which could go into a tailspin and re-test the recent lows in the near term.

Analyst
Dharmesh Shah dharmesh.shah@icicisecurities.com Nitin Kunte nitin.kunte@icicisecurities.com Dipesh Dagha dipesh.dagha@icicisecurities.com

Historical correlation between Sensex and US$/INR pair

Over the last decade, the growing clout of overseas investors is clearly visible as India has emerged as a force to reckon with in the global arena. If one wishes to use just one indicator to gauge how the Sensex is expected to move, the US dollar vs. INR could be a good measure to track. The movement of the greenback against the INR demonstrates the demand/supply equation between the two currencies. As the accompanying chart shows, there is an amazingly close relationship between the US dollar and the Sensex. In the above chart, the green line represents the Sensex movement since 2006 while the US$ INR movement in the same period is represented by the orange line.

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The above chart plots the Sensex against the dollar because when the dollar falls against the Indian rupee, the Sensex rises. That is hardly surprising because the dollar weakens when the Indian rupee is in demand and that indicates growing inflows of foreign money, which also gets channelled to the Indian equity markets. The chart clearly highlights the inverse correlation as the major peaks and bottoms of the Sensex and the US dollar have occurred simultaneously. An ensuing rally in the greenback has had negative implications on the domestic benchmark.

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

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