http://www.parakhi.com/blogs/2012/01/06/part-2-a-higher-savings-return-through-an-anticipated-npr-recovery
Part 2: A higher savings return through an anticipated NPR recovery
From its 43.85 levels around the end of Aug 2011, today USD/INR managed to touch 53.85 (it’s historical high)! Its resistance still stands at 53.90 that can soon be broken towards a new high again…If left to continue on its current uptrend, USD/INR at 60 could be a possibility since the EUR/USD will and still continues to tumble along. I have also attached my technical analysis on the USD/INR chart to this article showing how the trend has clearly changed upwards now and even though we saw the technical indicators (RSIs and MACDs) clearly pop to overbought levels, there has been no sign of slowing in the strength of the USD as of yet. And with the Eurozone’s economic woes and India still reeling in its own socio-political crisis, the worst in the INR is yet to come…Unless, the Reserve Bank of India (RBI) steps in and intervenes. Why? Due to a massive INR depreciation in the past several months, Manmohan Singh just cannot afford another bout with inflation. There have already been numerous inflation related riots in the past year and that could end up crippling an already fragile economy. Ultimately toppling his incumbent but highly unpopular Indian Congress party. Of course, there’s a catch when it comes to Central Bank interventions in the FX markets: The previous unsuccessful attempts of the Bank of Japan (BOJ ) and the Swiss National Bank (SNB). The SNB lost close to $35 billion trying to intervene in the Swiss Franc (CHF) last year. Similarly, the RBI’s effort could end up as a futile attempt towards plugging an overflowing manhole with a wine cork!
However, the market experience side of me screams out for an intervention attempt to come about once the USD/INR hovers dangerously close to 55.00. But even if this intervention works out for the INR, it will be a short lived exuberance due to the “negative India” fundamental plays I mentioned in my earlier article (Part 1). So, with that in mind, I’d prepare myself to expect the 60 level to be tested once the psychological 55.00 level breaks. Next, with the Eurozone’s debt woes being fanned by most traders making the EUR/USD short the most overcrowded trade in history, it has close to completely frozen credit for a few nations. To rectify this and prevent a meltdown, we could see a chain of similar Quantitative Easing step by the European Central Bank (ECB) just as the Federal Reserve Bank did 3 times since the Recession of 2008. This easy credit pumped by the ECB will surely make its rounds into the Emerging Markets via the Banks and Corporations looking a quick return on the low interest loans they have. Currently, we’re seeing foreign investment in Emerging Markets tightened due to the unavailable easy credit that were once available in the West.
Also, it’s to be noted that the US is in no better state than it was a year ago where economic data still show that the US is in a recession and things will not be changing anytime soon...In all reality, there is no real fundamental reason for the USD to continue appreciating. Its all the Eurozone woes that’s helping the USD appreciate. And at this rate where the US continues to borrow for it’s expenses without implementing any austerity measures, another row of massive fiscal injections will surely have to come about again. With the Democrats being in power, it’s a no-brainer…And yes, this will again further devalue the USD. Moreover, with jobs and the economy being the main topic of discussion in the elections next year, the US has barely been able to make Detroit and it's other industries compete in the worldwide exports arena (through it's weak dollar policy) and any appreciation of the USD could call for a death of these industries resulting in losses of trillions of dollars in ineffective policy and end up bringing an impending hugely dovish statement by the Fed…Risk on = USD Negative!
With the negative USD factors I mentioned above and seeing aspects of Emerging Markets positive, let’s get back to our INR positive stance where I believe, once we get closer to USD/INR at the 60.00 level, I believe, India’s stance on allowing multinationals to deal there will change for the better and we could see hawkish steps by the RBI undertaken to combat inflation. The RBI may try to bring USDINR down to the 50 level with massive monetary policy moves: As mentioned earlier, intervention and rate hikes to combat inflation to an optimal short term level thus appreciating the INR and this means only one thing: An appreciation in the NPR!
Now, with the ideas presented in the previous paragraphs, the basic investment strategy for my theory kicks in (with a limited downside risk): USD/INR = 59.00/60.00 (approx USD/NPR = 93/95) is where I as a member of the Diaspora would seek to remit funds back to Nepal to deposit into any basic Nepalese Bank’s savings account that currently yields 12+%. Also, if in the US, I'd try sending the money via the trusted hundi dealers here in Jackson Heights, NY who often give a 1% premium for sending the funds to Nepal…Yes, they give a better rate than the bank! And that now makes my total interest earned 13% (12% + 1%). Now, with my optimal depreciation target set at USDINR = 50.00 (approx USDNPR = 80), that is close to a 16% move. A total of 16% + 13% (from USD depreciation + savings interest + hundi) = 29%!! Another scenario that could play out for the better: USDINR could retreat back to its 2010 yearly average of USDINR = 45 since the US economy too is no different from what it was a year ago (as mentioned earlier, all this USD appreciation is solely Eurozone related)…That, my friend ends up being a 24% move. A total of 24% + 13% =37%!! Wow! Now, wouldn’t we all want that from our savings instead of the 1% I’ve been lucky to get with my bank here in the US…Not only that, we would also be helping Nepal revamp and build it’s economy further with our USD remittances. A perfect synergy!
My technicals for the chart: USDINR: Bearish at 58-58.50, build shorts. Continue adding to shorts until 60.00 If it does not break 60, look for it to retreat back to psychological 50 level. If it breaks 60, Stop Loss at 61.50-62.00
A Wall Streeter since 2002 and a doctoral candidate (currently an ABD), Nyangmi often lets the analyst side of him seek deeper meaning into the mundane nature of everyday life and it's socio-economic philosophies: Especially the topics on finance where he hopes to make it an easy subject for the Main Streeters to understand as well.
http://www.parakhi.com/blogs/2012/01/06/part-2-a-higher-savings-return-through-an-anticipated-npr-recovery
