Pound / Rupee Rate: Corrective Move Higher Forecast

Charts are showing recovery potential for the Pound against the Rupee after the recent steep sell-off.

The GBP/INR chart is showing the same spike lower on Friday as on almost all Sterling charts following the much-hyped electronic crash.

This spike retraced and in the process formed an unusually long recovery Hammer pattern below the lower Bollinger Band on the charts:

The Bollinger Band is an envelope around prices, calculated by taking the 20-period simple moving average and then marking two lines, one above and other below which sit at 2-standard deviations from the mean; it is signified by the light blue shaded region around price.

Theoretically, prices move within the bands for 95% of the time.

This means that when they stray outside there is a high probability that they will revert to the mean – or in layman’s terms move back inside towards the central area.

When a move outside the bands happens in conjunction with a long-tail hammer as in GBP/INR, it increases the odds prices will move back inside the bands or even reverse trend.

These set-ups have a high probability success rate of reversal, and so a move above 84.21 highs would probably lead to an extension up to the next target at 85.25.

INR Outlook Broadly Balanced say JP Morgan

The rupee’s outlook is broadly balanced, according to analysts at J P Morgan.

The highlight the currency’s recent outperformance compared to other Asian currencies.

This is as a result of “portfolio inflow momentum” which increased following the Reserve Bank of India rate cut last week.

The inflows reflect a more optimistic view for the stock market which will get a boost from the stimulus and an expectation of a rising bond market.

Nevertheless, J P Morgan slightly downplay this appreciation as a ‘lagged’ effect, so potentially also only having a temporary impact.

Yet they retain their INR long holdings, saying, “INR’s positive carry, greater immunity to external risk events (particularly related to US-China trade tensions), solid growth outlook and renewed reform agenda, leave us comfortable to own the currency on an intra-Asia basis.

“Long INR/KRW via the 6-month NDF is the current expression of this view.”

In addition, they dismiss the risk factor to the INR caused by FNCR redemptions.

These are rupee-dollar swaps, which have been maturing since September, and will result in the selling of rupees to purchase 25bn dollars, a process which is expected to weaken the rupee.

These swap contracts date from three years ago during the ‘taper tantrum’, when the RBI needed to defend the rupee from collapsing versus the rising dollar.

They opened up a swap line with the US which allowed them to exchange rupees for dollars at a discounted rate.

They could then replenish their low dollar reserves and use the money to purchase rupees in the open market and prevent their own currency from crashing.

We are slightly more bullish seeing the higher yield on offer in a ‘low yield world’ and fairly stable economic outlook for the country, as continuing to be a magnet attracting foreign investment inflows.