Monday, April 12, 2010

USD- INR : FORECAST FOR YEAR 2010-

USD - INR: 2010 - 2011
MACRO TECHNICAL VIEW 44.45
CMP: 44.4

Objective of this report

To forecast the price movement of USD – INR for the next one year and
propose targets through a systematic analysis using US Dollar Index.
C.Krishnamurthy Dollar Index – Historical Movement
Research Analyst
Krishnamurthy@pacefin.in
91–11–42022288
The Dollar Index is one of the most important global lead indicators for a lot of
financial instruments including the Indian Rupee. The progress of the US Dollar
Index from March, 2008 till date is represented in the following chart.
Chart 1: DOLLAR INDEX DAILY CHART (DAILY)

“Dollar index may

appreciate to 89-90
level or may
possibly even break
it in the next one
year”

From our study, we conclude that the US Dollar Index is on a powerful long
term uptrend since March, 2008 which has the potential to retest or even
breach the highs that it made in March, 2009 at 89.62 levels.
Monday, April 12, 2010

Dollar Index Correlation Analysis

For predicting the movement of USD-INR, we have evaluated the movement of

the US Dollar Index against three other financial instruments

i. Currency : A basket of Currency Pairs

ii. Equity : MSCI World Index
iii. Commodity : CRB Index

The comparison of US Dollar Index against these three financial instruments has
been split into four different time frames as below.

Phase 1: March, 2008 - March, 2009: Uptrend which started since March,
2008 and remained in force till beginning March, 2009.

Phase 2: March, 2009 - November, 2009: Correction to the uptrend from
March, 2009 till November, 2009 where Dollar Index went down, but
created a higher bottom and hence confirmed our premise of a long
term uptrend in Dollar index.

Phase 3: November, 2009 - April, 2010 (Possibly): Rise in US Dollar Index
accompanied by divergences with Emerging Market Currencies, Global
Equities & Commodities.

Phase 4: April, 2010 – March, 2011 (forecasted)

A) Correlation of US Dollar Index and other currencies

Phase 1: A very high degree of negative correlation in this period could be seen
between the Dollar Index & Emerging market currencies. A look at Chart 2
suggests that the Emerging market currencies were in a sustained depreciation
which was in line with the appreciation of Dollar Index from April, 2008 to
March, 2009.

Phase 2: Dollar Index fell sharply retracing 82% (refer chart 1) of its increase in
Phase 1. During this period the Dollar index was in a persistent decline and other
currencies inversely appreciated within this period (Refer Chart 2). This is again
in line with the negative correlation that exists between Dollar index and other
currencies.
Monday, April 12, 2010

Chart 2: US DOLLAR INDEX & EMERGING MARKET CURRENCIES (DAILY)

Extent of charticle retracement of different currencies in Phase 2 **

(March, 2009 – November, 2009)

CURRENCY RETRACEMENT LEVEL (%)

USD-BRAZILIAN REAL 86%

USD-TAIWANESE DOLLAR 68%

USD – KOREAN WON 69%

USD-INR 53%

USD-EURO 75%

USD-AUSTRALIAN DOLLAR 85%

DOLLAR INDEX 82%

**The above table shows retracement in Phase 2 of losses from charticle tops in 2008 to the end of
Phase 1 in March, 2009 (for some key currencies of the world).
Monday, April 12, 2010

During Phase 2, it’s of essence to note (refer table) that the Indian Rupee was one
of the rank underperformers against US Dollar. Most of the other currencies have
appreciated more than the Rupee. Hence, the Indian Rupee hasn’t been that
strong a currency compared to the US Dollar when judged against other market
currencies.

Phase 3: (Refer Chart 2) Emerging market currencies like Korean Won, Taiwanese
Dollar and Indian Rupee have actually appreciated in spite of a steep rise in US
Dollar index from the period December, 2009 to April, 2010, thereby showing a
divergence in their negative correlation which has now lasted for four months.

Note: Apart from the confirmed change of trend in Dollar index, Euro-USD is on its way to retest 1.25
(reached in March, 2009) - 1.23 (reached in October, 2008) levels or may even break these levels by
the end of FY 2011. Fundamental marker in terms of deteriorating health of European economies
may have spurred the reversal in US Dollar Index & Euro-USD.

B) Correlation of US Dollar Index and Equity

From the year 2002 onwards, the US Dollar Index and Global Equities have broadly
shared an inverse correlation. This inverse correlation has held since but with a
certain amount of time lag on few occasions.

We have considered MSCI World Index in our study vis a vis US Dollar Index.

Phase 1: Before the beginning of Phase 1 of our study, there was a period of
divergence from October, 2007 till April, 2008. After this period of deviation from
the norm, the inverse correlation rule came into effect which resulted in the
expected outcome shown below.
 Monday, April 12, 2010

Phase 2: US Dollar Index & Global Equities shared a perfect inverse correlation during
this phase as shown in the chart. The movement was completely a mirror image of
phase 1.
Chart 3: DOLLAR INDEX & MSCI WORLD (DAILY)

“Divergences
appearing in Dollar
index and MSCI
World Index is hard
to ignore”

Phase 3: Dollar Index had a reversal of its decline that it saw in phase 2 from last week
of November, 2009 and it has been on a steady uptrend since. If we glance through the
beginning of the financial crisis (refer chart 3), the US Equity Market started correcting
since October, 2007 however the Dollar Index reversed only in April, 2008. This implies
that there was a lag of over 6 months before the dollar index self reinforced and aptly
changed its trend.

This time however the equation is a bit different. Dollar index has changed its trend
first; however the Equity markets are yet to follow. The Dollar Index and MSCI World
Index have been on a four month long divergence. Could it just be a matter of time
before the inevitable correction in Equity Markets happens??
Monday, April 12, 2010

C) Correlation Of US Dollar Index and Commodity

CRB Index is the leading indicator for Global commodities. Hence, we have included it in
our study vis a vis US Dollar Index.

Phase 1: Dollar Index and the CRB index shared a broad inverse correlation; however
there was a lag in their inverse relation twice during this period. The first lag effect was
seen between March, 2008 – July, 2008 and the second between December, 2008 –
March, 2009 as illustrated in chart 4.

Phase 2: During this period, the Dollar Index and CRB Index also had an ideal inverse
correlation as shown below.
Chart 4: DOLLAR INDEX & CRB INDEX (DAILY)

Phase 3: Its evident looking at Chart 4 that although there was a lag, from 26th
November, 2009 when Dollar Index bottomed out till 6th January, 2010 when CRB Index
topped out. In spite of this lag, the inverse correlation between the above two
instruments is still maintained.

While most of the Global Equity markets are at a new high, CRB index is still below its
high that it made on 6th January, 2010. Does it indicate that the commodity Index has
sensed a reversal of its trend already??
 Monday, April 12, 2010

Phase 4: PROJECTION OF USD-INR (April, 2010 – March, 2011)

Conclusion from the Dollar Index Correlation Analysis vis a vis Emerging Market Currencies,
Global Equities & Commodities.

It’s quite evident that there is a deviation in the movement between Dollar Index & Emerging
Market currencies in Phase 3. If US Dollar has resumed its upward journey then it’s probably
only a matter of time before the Emerging Market currencies would restart their downward
journey.

Secondly, correlation between Dollar Index & MSCI world in Phase 3 indicates that divergences
in this case too are prominent. This may as well indicate a reversal in the Global Equities
anytime. Further, the emerging market equities have been underperforming the US equities for
the last six months. Any weakness in US equity can lead to a crack in emerging market equities
in the near future. This undoubtedly will impact the emerging market currencies adversely.

And last but not the least, the correlation between Dollar Index & CRB Index indicates that a
reversal may have already happened in commodities. It is quite likely that CRB index may have
USD-INR: 52 peaked out on 6th January, 2010 at 293.75 and has already begun its downward journey.

BY Technical Conclusion of USD INR

MARCH, 2011 By the time Phase 1 ended, Rupee had depreciated to 52.13 on 3rd March, 2009 which proved to
be the pivotal point for a steady appreciation till date.

As we have highlighted above, during current phase (Phase 3) clear divergences in the historical
correlation are appearing in the charts, as the Dollar Index is appreciating and USD/INR instead
of going up is actually going down. This means that INR along with other emerging market
currencies is appreciating against USD inspite of USD appreciating against the other developed
market currencies mainly Euro, GBP and Japanese Yen.

Our study indicates that rupee’s appreciation may halt any moment. In longer term trends, it’s
difficult to predict exact tops and bottoms however a long position in US Dollar against INR at
the current level of 44.45 offers extremely favorable risk reward trade.

Our research model signals that we may be in the vicinity of a significant charticle bottom for
USD-INR. Higher targets will open up for the USD-INR above 47 and it may not surprise us if it
tests or even breaks 52 level by the end of March, 2011.
Monday, April 12, 2010

NEWSLETTER TITLE

Financial Services

Head Office A 1/291 Safdarjung Enclave,

New Delhi -110029

Telephone 91-11-42022222 (50 lines), 26106371

Fax 91-11-26165176

Web Site www.pacefin.com

Disclaimer

The Research Department of PACE Financial Services has prepared this report. The information and opinions contained herein have been compiled or
arrived at based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified
and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and
opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their
securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an
offer, to buy or sell any securities or other financial instruments. PACE, its owners, directors, analysts or employees do not take any responsibility,
financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not
restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income,
etc. Investors should invest only in consultation with their financial adviser.

PACE and other group companies, its owners, directors, analysts, associates, employees may have various positions in any of the stocks, securities and
financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other
securities of the companies /organizations described in this report.