Indian Rupee Could see Relief if Oil Peaks at $80 a Barrel as some Studies Suggest

Image © Hemant, Adobe Stock

- Peak on the horizon for oil should bring relief for INR

- Extremes in future's market positioning signals imminent decline for commodity

- Final Elliot wave higher suggests end of major rally

The Indian Rupee may gain some respite from at least one of the negative factors 'biting at its heels', according to a compelling analysis of the oil market.

The price of oil, which is highly negatively correlated to the strength of the Rupee, may be about to decline.

The recent bull market in oil has led to further weakness for the already declining Indian currency as oil has risen from one high to the next, going from 50 to 60, and now over $70 a barrel.

The reason for the relationship is India's heavy reliance on imported oil for its fuel needs.

When oil gets more expensive, India has to sell more Rupees to pay for it putting downwards pressure on the currency.

The increased cost of oil also widens the country's current account deficit which then has to be financed by outside borrowing.

This has been the root cause of the recent sell-off in emerging market assets as investors have feared financial instability could result from widening imbalances.

A weak currency makes it more expensive to borrow and repay foreign debts and this puts even more pressure on the economy and the currency, in a negative feedback loop.

Talk of oil rising to 100 Dollars a barrel, however, is exaggerating the commodity's potential, says analyst Enda Glynn of Bullwaves.org, who sees cracks in the technical data, which suggests oil may be setting up for a fall. Something which would be positive for the Rupee.

Positioning data, which measures volumes traded in the future's market, tends to work in a counter-intuitive way with extremes of sentiment one way or another signalling imminent price reversals in the opposite direction.

The current data shows the number of speculators betting the commodity will go higher has reached an extreme number -  historically a symptom which has preceded declines.

"Look at how the opposing sides of the market were positioned in 2014, money managers hit the highest net long position in five years right before the market collapsed by 70% into the 2016 lows," says Glynn referring to chart reproduced above.

"Look at where the market is positioned now," he adds.

The situation now is actually worse than it was when the market fell back in 2014, however, because swap traders are net short the market by 500k contracts which is another sign the along with the long extreme that the market is about to fall.

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"The scene is set for another horrible decline in the oil price, the wave count says so, and the futures market agrees!" Says Glynn.

By 'wave count' Glynn is referring to his analysis of the oil market using Elliot Waves, which is likewise showing a decline is on the cards for the commodity
Elliot analysis rationalizes financial markets into repeating five wave patterns of buying and selling and one of these major buying waves is close to peaking according to Glynn.

Wave 3 of five has probably peaked and will be followed by a pull-back as wave 4 evolves before the final push higher as wave 5 unfolds and eventually finishes the bull-trend completely; after that, the decline will probably begin.

"Wave [iii] seems to have topped out at last nights highs," says Glynn.

Wave 4 - or iv using the roman numeral notations favoured by ellioticians - is likely to be a complex but shallow affair which could pull-back to around the $70-71 level.

"I prefer a more complex pattern for wave [iv], possibly a triangle. We will have to wait and see," adds the analyst.

This is likely to be followed by a final wave 5 higher to an upside target at circa 80 Dollars - which will be the peak of the current rally.

It is after the $80 peak that the commodity will start falling to target back down at the $26 lows  

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