Any up-leg on the Indian Rupee against the dollar should not push above 53, after which the currency should fall to 30. The weakness till 53 should not extend beyond the October-November seasonally low periods for equity. The 30 leg should last at least till late 2010. Despite the large rupee strengthening we are speaking about we are still not ruling out a few negative months on Indian equity.
Before we start explaining how we reach this figure we would like to speak a bit about headlines and sentiment indices. There are not many sentiment (survey) indices in India. We run a few for other emerging markets and want to replicate the same for India. Ed are you listening?
A sentiment indicator has a very simple working. It calculates percentage of bulls. If there are 70 per cent bulls the best of the market strength is already behind us and vice versa. Just like other price or volatility based indices, survey based indices work best at extreme values. In the absence of survey indices we use statistical indicators to understand the market skew.
Equities and the rupee
There is another thing we did. Open source has its mysticism and Google applications are leveraging on it well. We looked at the headlines on Indian rupee from December 31 till the recent high in equity in May. Now one may ask why did you look at equity high when you are studying the rupee. More than half of the stories on Indian rupee directly quote local stock markets, Asian stock markets or global equity as reasons behind the movement of rupee.
We classified the news into two parts. One from January till March equity lows and then from March equity lows till May equity highs. The chronology of some recent news on forex as depicted in the table (The news on the rupee).
| The news on the rupee | |
| December 31 | Rupee posts biggest yearly fall since early 90’s |
| January 07 | Rupee drops as shares fall on Satyam news. |
| January 09 | Rupee up as banks sell dollars, inflation falls. |
| January 15 | Rupee eases as stocks seen lower |
| January 16 | Rupee to start higher as Asian stocks up. |
| January 19 | Rupee trims gains on seesawing stocks. |
| January 20 | Rupee weakens on Asian moves. |
| January 21 | Rupee at one-month lows on outflow worries. |
| January 22 | Rupee erases gains as oil companies buy $ |
| January 29 | Rupee mostly steady amid mixed cues. |
| February 02 | Rupee weaker on drop in shares; stronger dollar. |
| February 12 | Rupee opens down as Asian shares fall. |
| February 16 | Rupee to tread water, await budget. |
| February 18 | Rupee to drop in grim global outlook. |
| February 19 | Rupee pares losses as stocks rise 1 per cent. |
| February 23 | Rupee may take cue from equity market. |
| February 24 | Rupee weakens on S&P’s outlook downgrade. |
| February 25 | S&P outlook downgrade may hurt rupee |
| March 01 | Rupee drops to record low on import payment. |
| March 02 | Sliding rupee triggers fears of FII selling. |
| March 03 | Rupee may hit 56 a dollar in 3 months: Barclays. |
What does this tell us? This tells us that most of the news from December 31, 2008 was drifting under the previous rupee trend of weakness for nearly 12 months. Most institutional calls from HSBC and Barclays during that period were about further weakness till 50 or 56. The recommendations were in a narrow band. Price was at 48 and the recommendation for 50. Behavioural finance talks about two kinds of analyst recommendations, either in a narrow band or a very large band (Orpheus call of Rs 30).
This means either overconfident or under confident but rarely well calibrated. What happened from March 3, 2009 when Barclays gave the 56 call? The rupee started strengthening till May high. This was the news which was reported on May 11, “Rupee at a three-month high on overseas dollar losses”. This means that news did not add much value and was in fact trailing the asset price.
We also checked the Google trends for rupee and the Sensex. Both the assets spiked together first in October 2008 and then in May 2009. Searches on Google were related to negative news in October 2008 and positive news in May 2009, no wonder the contrarians made money buying in October and were not in loss selling at May highs. Owing to more information generated by Dow and the dollar, Google even generates data on searches like “strong dollar” or “weak dollar”. Interesting how what the world searches create a sentiment index for the same asset prices.
Keep it simple
“Simplicity remains the most undermined investment approach.” This Garfield Drew statement keeps shocking us every time we realise that things are indeed very simple and our task as alternative researchers involves simplifying things rather than otherwise. A simple 200 day moving average model gave a buy signal (weakness signal) on February 19, 2008, which continued to run till May 5, 2009 resulting in a 25 per cent rise from 39 to 49. A no nonsense indicator is tough to believe. A majority of investors will prefer digging in tomes, but not use a simple average, because something so simple can’t be effective.
The view till Rs 30 can be explained through time cycles. There is a 3.3 year Kitchin cycle on Indian rupee also, which started in January 2008 and can end anytime between June 2010 and January 2011. According to this cycle, the rupee should have either topped in June 2009 or can at best extend till October 2009. Even using Elliott Fractals, the move on the rupee can be seen as a large three legged A-B-C Expanded Flat corrective which is finishing the second B leg after which the fast moving down leg should begin. Let’s see.
The author is CEO, orpheus.asia, a global alternative research firm
