We asked the above question in Dec ’17. The chart of Rupee Real Effective Exchange Rate (REER) and Nifty PE evolved since then, as below:
Nifty PE had reached 26.6, which was near the peak last seen in the 2007 market top. Hence, we were unable to be bullish on Nifty PE any more. Moreover, the strong correlation between Rupee REER and Nifty PE (especially seen to be strong near peaks) meant that we were expecting Rupee REER (122.57 in Dec ’17) to be dragged lower with Nifty PE in 2018.
Our view was proven correct. Nifty PE has seen a rather steep fall to 25.68 (Feb ’18) and 24.66 (Mar ’18). Along with it, Rupee REER has indeed been dragged lower from 122.57 in Dec ’17 to 119.51 in Feb ’18.
The REER of Rupee tells us how much the market rate for Rupee deviates from its fair value. An REER value above 100 implies that the market rate is overvaluing the Rupee, while a value below 100 indicates undervaluation. Hence, a fall in REER implies that the Rupee’s overvaluation has decreased ie the Rupee has weakened. The green zones in the adjacent chart highlight the close correlation between Rupee REER and USDINR (inverse).
After a phase of divergence between 2014 and 2016*, the correlation has returned.
*This suggests that the Rupee did not weaken as much as it should have during 2014-16.
In the adjacent table, we make indicative projections for REER, Nifty PE and USDINR on the basis of past examples, when steep falls in Nifty PE led to a drop in Rupee REER and a rise in USDINR. We project that if Nifty PE falls to 22 by Dec ’18, we could see USDINR rise to 67.
You can view our Economic Calendar with the current chart here.
In our last report dated 01-Mar-18, we explored the possibility of Euro falling to 1.18-16 in April-June due to a possibly bullish Gold/WTI ratio and seemingly overbought Euro derivatives positions. At the same time, we had retained our earlier “more preferred” view of a straight rise past 1.25-26 towards 1.30-35. The Euro has meanwhile ranged between 1.215-1.247 in March and April.
Euro is likely to test long term resistance (1.25-26; possibly 1.28) in Apr/May. After that, we prefer a dip towards 1.20-1.17 by Sep/Nov. A breach of 1.26-1.28 immediately after May is less preferred. This is because:
We are effectively changing our earlier preference of a straight rise past 1.26, to a dip from 1.26-28.
CORRECTION AFTER 1.26-1.28
The adjacent long term chart presents the dilemma in question: There is striking similarity in pattern between the 2003 breach of long term resistance and the impending breach of long term resistance near 1.25-26 (possibly 1.28). The question is: Will this resistance be broken immediately (in Apr-May 2018) or, will there be a correction first?
Till now, we had preferred a straight break past 1.25-26, to target 1.30-35. However, mounting evidence suggests a dip towards 1.17 from 1.25-26 (possibly 1.28).
Since Jan ’17, Euro (1.236) has been rising in a 5 wave upmove and is currently in the last leg of the 5th wave. This last leg is likely to extend up till 1.25-26, but could also move further till 1.28, which is seen as resistance in the above 13 day candlesticks chart. After the end of the 5th wave near 1.25-26-28, a correction till 1.20-1.17 is possible (1.20 and 1.17 are obtained as the 23.6% and 38.2% retracements of the upmove since Jan ’17.) Moreover, a support trendline joining lows from Jan ’17 also yields 1.20-1.17 as a possible target zone on the downside.
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Euro has historically seen close positive correlation with Crude. In our Mar ’18 Crude forecast, our preference was for Brent (72.1) to break support at 67 and move lower towards 62 in Apr-Jun, followed by a rally in the second half of the year towards 77-80. However, the support has held, with Brent already seeing highs near 73. We believe it could stay bullish till 75-78 in Apr-Jun, and then, Jul-Sep could see it take a bearish turn towards 65-63. This syncs with our projection of near term bullishness in Euro, followed by bearishness from June onwards.
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Above, we see inverse correlation between Euro and Gold/Euro. Gold/Euro (1091) has fallen from 1212 in Apr ’17. It is currently bouncing from long term support near 1070 and could target 1130-1150, causing the Euro to weaken towards 1.17 (possibly even 1.15). Similarly, resistance on Gold (in terms of Dollar; currently 1348) near 1350-1370 could push it down towards 1300-1275 and the Dollar Index could strengthen towards 93-95, which is the same as saying that the Euro could weaken. The boxes in both graphs indicate a divergence in trend since Apr ’17 for Gold/Euro (downwards) and Gold in Dollar terms (upward). It would be reasonable to expect some convergence of trends to happen in the months ahead, which thereby implies Euro weakness.
Euro is likely to test long term resistance (1.25-26-28) by Apr/May. After that, we prefer a dip towards 1.20-1.17 by Sep/Nov. A breach of 1.25-26-28 towards 1.30-35 immediately after May is less preferred.
In the backdrop of Brent and WTI both achieving new highs, we explore when our predicted bearish turn could happen. For the first time, we explore EIA’s Demand-Supply balance forecasts and also introduce a new Data View Section containing Production, Demand and Inventory data. Our projections for Dec ’18 are significantly revised.
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We asked the above question in Dec ’17, when the 10yr GOI yield was 7.09% and featured the below chart for the month of May in our 2018 Economic Calendar.
The GOI yield has indeed risen, to 7.77%, within kissing distance of 8%.
The US and German 10 Year yields have also risen from 2.38% and 0.31% towards 2.96% and 0.54% respectively. The global bond selloff was largely due to the rally in Brent to 75.5, plus a pick-up in growth and inflation expectations in US and Europe.
The GOI 10 Year yield rose also due to the initial fiscal deficit target (17-18) of 3.2% not being met. An interim attempt to control the Govt’s borrowing costs might be underway: through an increase in FPI investment limits for short-dated debt and through more Open Market Operations by the RBI this year.
However, with US yields likely to test 3.25% in the medium term, the 10Yr GOI yield should test 8% later this year. Beyond that, in case the US 10Yr happens to break above 3.25% also, then the 10Yr GOI might also rise towards 9.00% in the long-term, perhaps in 2019. For that, we might need Brent to break above $80 and target $90.
CAN LENDING RATES RISE?Movement in the 10Yr GOI is often mirrored in a similar move (after a lag) in the RBI’s Repo rate and in the SBI’s Lending Rate, as seen alongside.
With the RBI MPC members remaining hawkish, it is possible to see a Repo rate hike in the June RBI meeting. Also, since the MCLR is very responsive to the Repo rate, there could be a danger of lending rates also rising by 0.25-0.50%.
Assuming greater chances of a slowdown rather than a recession, we project the US10Yr to rise towards 5.25% (May-25), followed by a dip towards 4.55% (Jul-25) and then another rise back towards …. Read More
In our last report (10-Jan-25, Brent $76.95), we expected Brent to remain between $80-60 region with an initial test of $80 in Jan-25 itself before falling to $60 by Jun-25. Thereafter the price was expected to rise slowly in the second half of the year. Brent rose to a high of $82.63, past our Range Top of $80, but has fallen back below $80 from there. … Read More
In our Dec-24 edition (12-Dec-24, EURUSD @ 1.0505), we expected the Euro to limit its downside to 1.0333 and bounce back towards 1.0650-1.08 by Feb-25 followed by an eventual rise to 1.09-1.11 by mid of 2025. But contrary to our expectations, Euro broke below 1.0333 and sustained lower towards 1.01. ……. Read More
Our January ’25 Quarterly Dollar-Rupee Forecast is now available. To order a PAID copy, please click here and take a trial of our service.
Our January ’25 Quarterly Dollar-Rupee Forecast is now available. To order a PAID copy, please click here and take a trial of our service.