Sunday, September 11, 2011


The Dollar Index is on the verge of a breakout from a consolidation. The current consolidation is a mirror image of a similar process in 2008 which led to a breakout from 77 to 88. See chart below

A rally in the Dollar Index means:
(a) A decline in the value of the Rupee.
(b) A rally in the Dollar Index could mean a rally in IT stocks - Infosys, Wipro, TCS, HCL Tech, also to a lesser extent, the mid cap IT group.
(c) In the short term, FII inflows may decrease because of the adverse exchange environment.
(d) Companies with large US$ borrowings may find their borrowings have gone up in Rupee terms. Bharti Airtel may be one such company.
(e)A rising dollar eventually produces lower commodity prices. Lower commodity prices, in turn, lead to lower input costs for Indian companies. The lower costs will be offset by the costs of the rising dollar. I am not sure what the net effect will be.

Readers are requested to explain what the exact implcations of a dollar index rally is. Please share your knowledge.


Pi said...

good points. my opinion -

while the consolidation and the breakout (for me the breakout has already happened) seems very similar to 08, its my opinion that we will not see a similar rally, but there should definitely be a rally lasting for some time atleast as its broken out of a multi month consolidation.

what i have noticed is that over the past 4 months all assets classes have been correcting the bullish moves they made in the past 1 year after QE2 got announced at jackson hole last year. Just that everything has not gone down at the same time and the corrections have been rotational.. while commodities corrected majorly in Mid-may - jun, equities did so in late july-aug, this time it is the turn of fx pairs. anyways, nothing can be said with certainty and time will tell.

if there is a correction in commodity prices it will be greater than the offsetting impact of a depreciating rupee (RBI steps into support Rupee from sharp moves, plus rupee will fall by max 3-5%, whereas base metals & agro commodities could easily tumble 10-20%). actually this time round i see a crack in base metal prices. not sure about other areas.

IT stocks could start outperforming, but we have to see a sustained selling in rupee. I saw this affect in play in 08. IT stocks started underperforming when rupee had touched 40, and outperforming when rupee reversed and touched 50...

Tarique Anwar said...

The net effect has to be negative equities. Some amount of rally could be digested, but a massive rally, means there is very high risk aversion in global players. In that case every stock market in the world should be selling off.

Every dollar peak has corresponded to a bottom in Nifty

RS said...


I am not sure about the fundamental theory...but still here is what my takes is on the current environment.

a)Rupee (against dollar) has formed a triple bottom and broken out expect it to touch 50-52 gradually
b) Nifty should break 4700 (I don't think 5200 is gonna be broken for good 3-4 months) and should gradually move in the range of 4470-4600 for the near term so as to complete the 5th wave of a Wave 3 correction in a bear trend
c) Once S&P breaks 1100, which it should in next 1-2 months...all hell should break loose.

All my take is based on a fair amount of EW theory. I am not sure, how far will it stretch. Because as they always say in Hindi..."MARKET kisi ka saga nahin hai"

BTW Sir, I haven't ever heard u talking in terms of Waves n all. U not a big fan of it ???


jonak said...

a rally in dollar now Sir ji, means CREDIT CRUNCH..u might have heard of banking problems. The interbank lending market is frozen , rates are going high each day, banks are not lending to each other . There is huge shortage of dollar. That means players will sell-off other assets , (including may be GOLD) get hold of dollar....its 2008 all over again....we are in BIGGER trouble...if the EUROZONE is broken , 1930 deppression will be a trifle comparing to it ...

Pi said...

okay.. my understanding is as per the news streaming out of europe since last two days is that greece is going to default within a few weeks.. european govts have started preparing backup plans to support their banks in case of an eventual default. actually this is the start of the end of the problem. once a default is out of the way markets will be able to breathe freely again.. but there would be pain in the immediate short term around a default..

Pi said...

And I was buying shares aggressively since last fortnight.. but my view has just changed in last 3 days.. im gonna get out and get back in later..

Pi said...

actually let me put it slightly differently .. i expect that rate sensitives might suddenly start outperforming.. but the problem is that high beta will not be able to survive this volatile environemtn.. but when ever i plan to buy, i will buy the rate sensitives first, cause rates, inflation and commodity prices all going to move in their favour over next few months..

PhoenixTrader said...

A dollar rally is "risk off". So EM should sell off. There is little point in daily commentary. Everyone is safe sitting out.

Pi said...

okay. wanted to share some more insight. As i wrote above.. news flow, not just analyst opinions and other headlines suggest that a greek default will happen.. its only a matter of when. the surest indication was german govt preparing a contingency plan in case of a default and how to protect their banks etc etc.. things are serious.

but everyone in the market knows that. atleast large institutions who move markets know. im sure if i do they definitely do.

now come to analysts opinions voiced on tv, online etc.. whole hog of western opinion keeps saying markets will tank if such event happens etc etc.. thing is, market wouldn't wait for the event to actually happen to price it in. S&P would have been trading much lower.

So the understanding i can derive is that (a) this chatter of default is all wrong, its just a ploy by core european countries like germany to put pressure on greece to implement measure agreed on earlier and an eventual defautl won't happen; (b) a default is priced in, and it might be a positive in the medium to long term as it will remove uncertainty.the actual event might see selling for a day or two, but then we see strong rally emerging from there..

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