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08 June 2016

RETAIL RESEARCH

Indian Currency Market – A Technical Perspective for Traders and Hedgers
Currency Pair
USD/INR
EUR/INR

CMP

Prev.
Close

Immediate Supports

Immediate
Resistances

Next Supports

Next Resistances

66.65

66.78

66.63-66.51

66.96-67.05

66.39-66.23

69.40-69.70

75.69

75.80

74.64-74.32

76.02-76.20

73.48-72.98

78.22-78.55

The week gone by saw the USDINR pair sliding sharply
lower as it broke the mid band of the 21-day Bollinger
Band. In the process, the pair also reversed its uptrend as
it moved below the previous swing lows of 66.75.
Technical indicators are giving negative signals. While the
pair trades below the 13-day SMA, momentum readings
like the 14-day RSI are in decline mode and are not yet in
oversold territory.
In the near term, the pair could move lower once it breaks
the immediate supports of 66.51.

The EURINR pair rose sharply last week as it found
support from the lower band of the 21-day Bollinger
Band. It had touched a low of 74.32 last week.
The rally saw the pair crossing the mid band of the 21-day
Bollinger Band and almost touching the upper band of the
21-day Bollinger Band.
Technical indicators are now giving positive signals. While
the pair trades above the 13-day SMA, momentum
readings like the 14-day RSI have bounced back from
oversold levels and are now in rising mode.
However, with the 21-day Bollinger Bands narrowing, the
pair could trade in a narrow range in the near term.

RETAIL RESEARCH

Page |1

RETAIL RESEARCH Indian Rupee Currency market moves against major world currencies JPY/INR – JPY/INR has corrected from the highs. Further downsides are likely. Further downsides are likely. RETAIL RESEARCH GBP/INR – GBP/INR has corrected from stiff resistances. Page |2 .

Every exporter/importer may follow the following steps to manage their exposure: Determine risk exposure: The following will help to determine their risk exposure:  Percentage of sales or purchases (especially receivables and payables) that is done in foreign currencies. the level of impact varies from sector to sector and the ability to withstand this impact is also different from sector to sector. IT companies have greater capacity to withstand the impact of Rupee appreciation or depreciation. it is the exporters who benefit from it.RETAIL RESEARCH Strategy for Currency Hedgers With our expectation of further downsides for the USDINR.  Is the environment such that the importer/exporter is not in a position to pass on the Currency losses by increasing the prices?  Can the importer/exporter enter into price variance clauses with the other party based on exchange rate fluctuations?  Does the importer/exporter have a tight cash flow? Can adverse Currency fluctuation cause problems for the firm? RETAIL RESEARCH Page |3 . it is the importers who benefit from it and when the Indian Rupee depreciates. A primer on Currency Hedging Hedging in the Currency Futures market is an effective tool to mitigate currency volatility risks. Exchange rate fluctuations impact different segments in various ways. Hence. a company dealing in IT and IT-related services usually has a higher margin than an individual dealing in the handicraft or textile sector. We can classify this impact as follows: Impact on exporters: Strengthening of the Rupee is a nightmare for exporters. This is because the strengthening of the Rupee favorably affects an importer as their payments for imported goods go down when the Rupee appreciates. while the weakening of the Rupee boosts their profit margins. it is more important for exporters to hedge their receipts for the next 1-3 weeks. Impact on importers: Strengthening of the Rupee favorably affects an importer as their payments for imported goods go down when the Rupee appreciates. When the domestic Currency appreciates. it is very important for them to protect their exposure in an efficient and effective manner. For example. However. Forex Risk Management As Currency fluctuations can adversely impact importers/exporters. Importers can choose to go light on hedging their payments if they are willing to take the risk. Currency Futures are Exchange Traded Derivatives which can benefit the exporters and importers through hedging their Currency risk and minimizing loss due to Currency volatility.

but with the advent of Currency Futures. Determine risk mitigation tools: Importers/exporters can choose from any of the following tools: A. Selective hedging: This is a good method if the importer/exporter has significant but short-term foreign currency exposure. Currency forwards may also be used.RETAIL RESEARCH  At what point will a change in exchange rates affect the profitability significantly?  Which Currencies is the firm exposed to and in which Currencies does it have payment obligations? Determine risk mitigation strategy: The following strategies may be followed. firms with forex exposure spread some part of their risk mitigation strategies to Currency futures exchange. In such a scenario. Currency Futures are also more liquid as they are standardized contracts traded on exchanges. The forward contracts are entered into with authorized dealers (mainly Banks) in the OTC market while the Futures contracts are entered into on the Currency Futures exchange. depending on the level of risk exposure A. Although Currency Forwards can be customized to the needs of the parties involved in the transaction. B. As a general rule. the importer/exporter simply accepts the forex risk. C. etc. Systematic hedging: Here. Currency diversification: Firms can reduce their currency risk by diversifying the Currency base. B. No hedging: In this situation. C. Forward/Future contracts: The Forex Future contract is an exchange traded agreement to convert a given amount of a currency into another at a predetermined exchange rate and on a predetermined date. It is the preferred instrument for hedging against Forex risks. the more the business relies on forex cash flows. These are traded on the Currency Futures market. he can decide to hedge 30% to 70% of his total exposure and be prepared to benefit or lose from the unhedged portion. Illustration 1 RETAIL RESEARCH Page |4 . Yen. the firm hedges the position as soon as it enters into any foreign currency commitment. firms can reduce their dependence on USD/INR exchange rates by accepting/placing orders in other Currencies such as Euro. the more important it is to hedge against foreign currency risk. Hedging is not necessary if only an insignificant part of the total business is exposed to forex risk or if the firm can pass on the entire loss arising from foreign Currency transactions to its customers. they are less liquid and are exposed to counterparty risk. For example. They allow you to profit when exchange rates move in your favor and also limit your downside when the opposite happens. Traditionally Currency Forwards was the popular way of hedging the forex exposure. Call and Put Options: Call and Put Options act like an insurance policy.

80 *50 * 1000 = Rs 40.50.INR December 2013 contracts (on 15 July 2013) 65.95. Illustration 2 A jeweller who is exporting gold jewellery worth USD 50. He wants to lock in the exchange rate for the above transaction.INR October 2013 contracts on 15 July 2013 (1. At the time of placing the contract one US Dollar is worth 65.70.000 Buy 100 USD .55.INR contract size USD 1. with the delivery date being four months later. Let’s assume the Indian Rupee depreciates to INR67.10 Sell USD 50.80.RETAIL RESEARCH A crude oil importer wants to import oil worth USD 1.e.000 and places his import order on 15 July 2013. then the value of the payment for the importer goes up to INR 67.7000) * 100 (assuming the October 2013 contract is trading at 65.000 * 65. RETAIL RESEARCH Page |5 .000 Later Buy 50 USD .000.000.70) * 100 = 1. (transaction costs not considered) Had he not participated in the Futures market he would have to pay Rs.000 = INR 32.10 in December 2013 (assuming that the Indian Rupee appreciated to 65.000 rather than the original INR 65.000 Purchases in Spot market at 67.00.000 in July 2013 wants protection against possible Indian Rupee appreciation in December 2013.000 The net receipt in INR for the hedged transaction would be: (50.50 * 100.000 *65. when he receives his payment. Profit/loss from Futures (December 2013 contract) 50 * 1000 *(65.90-65.90 .One USD .50.000 for the import.One USD .5000 .50 Profit/loss (Futures market)= 1000 * (67.000) – 1. i.50.67.000 in Spot market at 65.000.50 per USD by the time the payment is due in October 2013. The hedging strategy for the importer at the time of placing the order would be: Now Current Spot rate (15 July 2013) 65.INR contract size USD 1.50 – 65. he would have got only INR 32.80.10) + 40. His strategy would now be: Sell 50 USD .INR December 2013 contracts in December 2013 at 65.50 Indian Rupees in the Spot market.70 on 15 July 2013) Later Sell 100 USD .10) = 0.INR October 2013 contracts in October 2013 at 67.000 = INR 65.50 Total cost of hedged transaction (67.10 per USD by the end of December 2013). Had he not participated in the Futures market.000.

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