FxWirePro: Spotlight on Indian rupee ahead of union budget – Uphold USD/INR zero cost call spreads

It’s a budget day today, Indian financial markets keenly eyeing on finance minister’s debut union budget presentation.

The prime priority of this budget is likely to be on the stimulus to reasonable growth momentum that was predominantly dragged backward owing to the tepid growth in agriculture, trade, and services sectors in the past. 

Although we have already seen some outperformance of INR in NEER terms, whilst Indian equities and portfolio momentum have also outperformed relative to regional peers.

Historically, majority of the times during budget days, USDINR surged higher during the course of the day, while only at once instance USDINR made a high less than the previous close.

The past track also shows that USDINR might open very near to a previous close and less than the same, but never made a gap-up reasonably.

USDINR is likely to trade tepid in the beginning and is expected to surge further during the day and make a close with modest gains. 

Technically, USDINR spot prices are attempting to consolidate above the support of 68.50, while momentum oscillators like fast stochastic curve (14/3/3) is seen in the oversold region with downward convergence, shows %k crossover that may support consolidation phase in coming days. On the flip side, with rising open interest and dipping volumes to price slumps may also turn the table.

Trading tips:

The macro analysts remain cautious on INR and see it grinding to 70-72 levels by the end of the summer and point out that INR FX valuations are not screening cheap, while the RBI’s easing path is likely to leave to central bank reluctant to see significant INR outperformance.

We initiated zero cost call spread for USDINR, the idea was to hold the short election tenor / long back tenor calendar trade past the expiry of the front tenor option, we now look at the MTM for 40D vs. 40D/20D for various tenor combinations immediately following the election as a measure of downside risk. 

Historically, equivalent structures have performed well in prior and post-election scenarios as the structure was held past the front tenor expiry.

Hence, we recommend approximately zero cost, long 4M USDINR 71.0/72.8 call spread @7.15/7.5 vs 7.875ch financed by short 6wk 71.0 call, 8.825ch. Spot reference: 68.68. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -25 levels (which is mildly bearish), while articulating (at 05:25 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex