Emerging Market FX: Month Review & USDINR Trade

As we come into the tail end of October, I want to focus this weeks report on reviewing the Emerging Market FX pairs I have introduced you to and updating the sets ups that I am monitoring.

I also want to take this opportunity to alert you that from November I will be updating trades referenced in these weekly reports via my twitter feed which you can follow at @LFXPatrick.

USDSGD

We started this month with a review of the Singapore Dollar, we left the fundamental review just ahead of the MAS (Monetary Authority of Singapore) meeting, which surprised market consensus by reducing the current slope of the monetary policy band for the second time this year, while maintaining other policy variables like the width and center of the band.

Recall the MAS are responsible for determining the trading band for the USDSGD to defend against imported inflation and maintain the export attractiveness. The modest and gradual appreciation referenced by the MAS at the meeting is a further sign of their willingness to defend against precipitous depreciation against the USD.

So with the MAS showing their hand and committing towards gradual appreciation lets turn to the charts and see where we are with respect to the pattern we were tracking and where the opportunities may exist now. Below is the chart pattern I was tracking ahead of the meeting

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You can plainly see that we broke the primary support zone without getting the intraday reversal pattern I referenced hence no trade trigger. My attention now shifts towards the secondary trend support level. The pattern I am tracking now is referenced in the chart below.

I am looking for a push towards the 1.36 trend line and horizontal support zone, looking for intraday reversal patterns to venture long targeting a retest of the broken ascending trend line support and the double top supply zone at 1.42/43. Remember these trades I am highlighting are position trades so I wont chase the market I will wait for it to come to me.

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USDCNY

The major development since we visited the Chinese Yuan earlier this month is that the PBOC ( Peoples Bank of China) made the move I alluded to in the review of the fundamental landscape and cut the RRR (Reserve Ratio Requirement) late in New York trading on Friday. They cut the one year lending rate and deposit rate by 25basis points. Lowering the overall rate by 50 basis points. The Bank also took the move to remove the deposit ceiling rate. This is an unprecedented interest rate liberalization, the impacts of which are only likely to materialize over the medium term with little impact in the near term.

With this recent action the PBOC has raised the deposit ceiling rate, as it has done before, but it now uses moral suasion to deter banks from raising deposit rate unnecessarily above the benchmark level, essentially prohibiting banks from bidding up the funds rate internally. A secondary effect of this move is aimed at suring up loan demand which has been in decline of late. The flood of liquidity should ensure that borrowers concerns regarding unseen spikes in interest rates are addressed and hence demand should re-emerge, with the new back stops in place. By removing the deposit ceiling conventional banks are also give the go ahead to compete with shadow banks for funds.

With respect to FX, China will continue to deploy FX reserves as required to defend stability in Yuan trading. With the Fifth Plenum underway finishing up Thursday markets eagerly await the next five year GDP targets.

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From a trading perspective I continue to track the pattern referenced earlier this month, monitoring the market for a decline towards 6.30/6.29 levels where I will be watching for reversal patterns to position on the long side, leaning against the prior double top at 6.28 targeting a mover back towards 6.39 overlap level. If price break out of the current corrective channel I will reassess the set up likely looking to buy a retest of channel resistance as a support level to enter against.

USDBRL

As discussed in last weeks segment political risk remains elevated in Brazil. The lingering scandal regarding Petrobras corruption allegations, whereby politically appointed management are accused of taking kickbacks for inflating the costs of construction projects invoiced by the state owned oil producer. These allegations not only implicate the former President Lula but has led to a legal group seeking to formally impeach current President Rousseff with charges related not only to the Petrobras scandal but additionally allegations based on illegal election funding.

While the  corruptions scandals take front page, the domestic economic landscape continues to decline. Elevated inflation remains a principal concern as does the depreciation of the domestic currency, which is continuing to hamper the beleaguered Central from further monetary easing and adding to the political woes as President Rousseff threatens replacing the current Central Bank Head in the hope to drive through further expansionary monetary policy.

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So with turmoil defining the fundamental landscape I hold firm to the technical pattern I am tracking as presented in last weeks post.

USDINR

So we come to our final pair that we reviewed this month and the pair that is most likely to trigger a trade in the near term. The Indian Rupee has corrected broadly in line with Emerging Market risk sentiment, buoyed by the stabilization in the Chinese growth narrative and marked uptick in emerging market exports to the US which combined with the push back in rate hike expectation in the US have formed a perfect combination to support the Rupee correction thus far.

With global equity advances stalling at present ahead of tomorrow’s FED meeting amid concerns regarding the FOMC statement, economists are starting to express concerns regarding the recent rebound in India’s fiscal and current account balances, which have been supported of late by a bounce in real rates and an increase in the Central Banks USD reserves. These factors will likely prompt some corporate hedging at these more attractive levels, given many businesses remain concerned regarding the potential for a US rate move before year end, it is likely this activity in the near term could stem the INR advance and any hawkishness out of the US could turn the stall into a stampede into year end.

From a technical trading perspective the USDINR is testing the support zone highlighted in this months post. In the chart below you will see I have highlighted my trade levels for this pair I am looking to enter on a break of the prior high before the support zone test and i will place my protective stop just below the recent lows as highlighted in the chart below.

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  • To clarify my entry will be on a break of 65.2500 with a stop at 64.2500 my initial target will be a retest of the August highs at 66.8900, with my ultimate objective being 68.8000 as per my original analysis. As always I only risk a conservative 1% of my account equity.
  • This trade not only benefits from technical pattern support but also On Balance Volume, Psychology and Linear Regression indicator support as they are all positively aligned towards the trade direction.

Be sure to follow me on twitter for updates on this trade and any of the other Emerging Market FX pairs we have highlighted this month @LFXPatrick