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India, the world’s second-most populous nation with over 1.3 billion people, has finally stepped up measures to halt the spread of the pandemic.

More than 80 cities and districts across the country have been placed under stringent lockdown after cases of coronavirus were detected there.

All districts of the national capital New Delhi will be locked down. The government of the state of Maharashtra, home to India’s financial hub Mumbai, asked all non-essential businesses to close through March 31

This essentially shuts down India’s main centers of government and finance, although banks and the stock exchanges will remain open.

The lockdown risks worsening an economy that’s already set to grow at the slowest pace in 11 years.

India’s rupee weakened to an all-time low last week and stocks got hammered as the global financial markets continued to meltdown. 

“Hot money” is leaving. Foreigners have pulled a combined $10 billion from Indian shares and debt so far this month. This is the biggest withdrawal since the U.S. taper tantrum of 2013.

What is “Hot Money”?

The U.S. dollar inflows into financial markets are often called ‘hot money” because they get in and get out very quickly (potentially leading to market instability).

“Hot money” is the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differentials and/or anticipated changes in exchange rates.

When the U.S. dollar inflows come, the currency of the receiving country generally appreciates and gives a feeling of safety and security from any external shocks. However, when the outflow happens, the currency depreciates in rapid fashion, leaving the country in a vulnerable situation.

 

To ensure the local market doesn’t freeze up, the Reserve Bank of India is injecting both dollar and rupee liquidity.

Supposedly, the Reserve Bank of India has begun using its record foreign reserves (~$480B) to try and stem the rupee’s decline. (It’s selling its stash of U.S. dollars and buying rupees.)

Due to the uncertainty of how the coronavirus pandemic will affect India, it’s anybody’s guess on what the central bank can do to alleviate concerns and convince the “hot money” to stay.

If the Reserve Bank of India can’t, there could be a massive outflow, and the value of Indian rupee against the US dollar would plummet.

USD/INF Weekly Chart

If we take a look at the weekly (1W) chart, the USD/INR has tried to stay around 70 over the last two years, trading between 68.50 and 72. That’s about a 350 pip range.

But in March, USD/INR broke through 72 and quickly rose to 76.

In less than a month, it’s jumped 400 pips!

So for two years, USD/INR had moved within a tight 350-pip range, but now, in less than a month, it’s moved over 400 pips already. 😱

The turmoil in the global financial markets of the US, Europe, and Asia are creating trouble as foreign investors are leaving en mass.

The coronavirus cases have yet to stabilize in Italy and Spain while the UK and US are seeing an exponential rise in cases.

With so much uncertainty, I think the demand for the U.S. dollar will continue and I expect the Indian rupee to further depreciate.

USD/INR Daily Chart

On the daily (1D) chart, we can see clearly how price was capped at the 72.00 level until….all hell broke loose in the currency markets.

Price smashed through that ceiling and jumped to 74.00 before consolidating for a couple of days.

It then spiked above 76.00 before retreating back below 75.00. (This is where Reserve Bank of India might have intervened in the market to try and contain the price surge.)

Today, price is back above 76.00 with a big strong green candle.

So where to enter long?

I see two places for an entry.

  1. One can enter long at market (76.40).
  2. Or wait for a pullback and enter long when price retreats to 74.00.

The risk with the first option is that the Reserve Bank of India might intervene and push price back down.

The risk with the second option is that price may not fall back down to that level and you miss out.

I’m going to size small and enter at market.

My stop loss (SL) will be 71.00. I see strong support levels at 74.00 and 72.00, so if these levels fail to hold then I’m out.

Looking for a profit target (PT) is tricky.

If we zoom out and look at a monthly (1M) chart, we can see that USD/INR is hitting all-time highs and there are no previous resistance levels!

USD/INR Monthly Chart

So how high could the price go?

It’s hard to say.

But I think it really depends on how much rupee depreciation that India’s central bank can stomach before it either A) takes more aggressive measures to slow the depreciation or B) throws up its hands and gives up….allowing the rupee to fall where it may.

We can look for potential clues for what’s possible. In 2013, from May to August, USD/INR went up about 1,600 pips.

So if we’re just at the start of a massive upside breakout, and we’re starting at 72.00, then 1,600 pips above that is…

88.00! 😱

Can it really go that high?

I guess we’ll find out!

I will target 82.00 as a potential profit target and will evaluate price action as we near that level to determine whether to exit or to continue to hold.

If price gets to 80.00, there’s a chance that price might get choppy there and will keep an eye on price action here as well.

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.