was in a sweet spot in the latter half of 2018, as crude oil
prices started depreciating from October onwards. Crude has corrected nearly 35 per cent since then, and Indian rupee too has appreciated from 75.45 to 69.50 level, a rise of 7.5 per cent.
Strong US Dollar has taken some shine off the Indian unit or otherwise we might have seen rupee appreciating by more than 10 per cent due.
At present, rupee is once again focusing on crude oil prices, and correlation with it is extremely positive. In fact, last five trading session, a correlation between the US dollar and equity market is close to zero and total correlation with crude oil prices is near 80 per cent. So once again our currency movement is focused on crude.
There are several reasons why we feel crude oil prices will increase going forward. American inventories continue to decline amid a federal government shutdown. Crude oil open interest is increasing along with price indicating fresh long positions being created.
(Source: Weekly Stocks of Crude Oil Report – EIA)
The chart shows five years of crude oil stock spread. It has dropped 27 per cent on a weekly basis. This is the sixth consecutive decline and US stocks are on the edge of returning in shortage compared to the five-year mean. This should bring tailwinds to crude oil prices.
In December, Opec and Russia agreed to curb production, and we expect January’s data to come lower as all Opec+ nations want higher crude oil prices. Saudi Arabia has made significant cuts and we expect crude oil prices to remain elevated.
US-China trade talks are going nowhere and the last time we saw when trade talks were in limbo, US dollar was getting safe haven status and its value continued to appreciate.
While Dovish US Federal Reserve statement may create headwind for the dollar, but as long as US-China trade talks don’t come to any conclusion, the greenback will continue to enjoy safe haven status and this will be negative for Indian currency.
Here is the USD-INR daily chart, as we can see it has completed 5-wave Elliot wave pattern and flat corrective pattern wave. Now it is creating first wave after which, we may see some pullback in form of a second wave. The trend is cleary showing that we may see USD-INR falling towards 74 level, according to Elliot wave formation.
Rupee clearly see strong resistance at 69.80 where USD-INR failed to sustain and fell from there after making a short base. So technically and fundamentally we expect rupee to depreciate in 2019.
(Bhavik Patel is Senior technical analyst at Tradebulls Securities)