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Let Volatility Decide USDINR Trajectory

Share Written By
Rahul Gupta

Head of Currency Research

22 Oct 2020

For a longer time, the USDINR pair is struggling to find a firmer direction and is seen drifting sideways in between 73.00-74.00. While the situation with the dollar index is largely reacting to changes in risk sentiment that is US fiscal stimulus hopes. The market risk sentiments look good and the dollar is underpinned below the resistance of 94. But the chances that the deal could not be made before the Nov 3 election are high and are keeping the dollar index afloat 73. USDINR being directly related to the dollar index is unable to break the 73 zones.

We are ideally two weeks away from the US elections, and as it gets closer the uncertainty will continue to increase. The chances of Democratic Nominee Biden winning are getting stronger. Somewhere the stock market seems to have priced in a blue way, but there is no confidence in the Democrats taking control of the Senate.

This Thursday’s final debate is President Trump’s last chance to hold some ground. Also, the matter of fact is the polling gap between Trump and Biden getting narrow. The narrow polling gap ahead of US election event risk amid an impasse over the fiscal stimulus package will increase a lot of volatility in USDINR. The caution ahead of election outcome has surged the USDINR ATM Implied Volatility to 7%, for the first time since May 2020. Currently, the USDINR ATM Implied Volatility is hovering in between 6-7%. Meanwhile, the Options Max Pain Theory suggests that the futures expiry will come close to 73.50. We are still 8 days away from the ETCD contract expiry, we expect the USDINR spot to trade within a broad range of 72.75-74.25.

Technically, the USDINR spot is strongly holding its crucial support zone of 73.0/73.20 in the past few days and is currently hovering around 73.40. Immediate resistance lies at 73.55-73.60 (key 61.8% Fibonacci Retracement level) and crucial resistance is observed at 73.75 which is also 78.6% Fibonacci Retracement as well as 50 days Moving Average level. If the volatility increases and the pair sustains above 73.75 then doors will be open for 74.0-74.20. The strong support zone is at 73.0/72.90 (Bollinger band’s lower level) and consistent trading below 72.90 only we can see a corrective leg towards 72.75-72.50.

While, in the US Dollar Index (DXY) daily chart, immediate key top-to-top trend line resistance is at 93.80 and the crucial resistance zone is at 94.0-94.05 which is around the major 61.8% Fibonacci Retracement level. Only consistent trading above this mark will open doors for 94.40-94.60 and then 94.75. On the downside, immediate support is at 93.30, and 93.0 (Bollinger band’s lower level) continued to act as strong support for DXY. If it falls and sustains below 93.0 then only the next support is located at 92.75-92.50.

So we recommend Importers to hedge 30% of their exposure around the current level, 73.30-73.40, while aggressively hedge 50% once the pair starts trading above 74 and remaining 20% around 74.50-74.60 levels. While for Exporters, we suggest hedge 30% of their term exposure near the 73.30-73.40 zone, 50% near 72.90, and the rest 20% near 72.50.