Mild recovery was seen in the United States Dollar/Indian Rupee (USD/INR) pair in the trading week gone by. As per expectations, the bears took a breather after a massive fall during August 24-September 1 week and the currency pair closed with a weekly gain of approximately 14 paisa at 73.43 per US dollar.
Moving ahead, in the forthcoming trading week traders can expect the currency pair to trade sideways with a negative bias, and sell on rise might not be ruled out. The recent mild recovery has taken the shape of a bear flag pattern which could result in supply pressure in the currency pair at higher levels.
The Bearish Engulfing pattern formed in Wednesday’s trading session indicates that bears are likely to have an upper hand in the coming days. The lower top and lower bottom cycle is still intact and the prices are trading below all major short term and medium-term moving averages. The 74.10 to 74.25 rupee per dollar zone is likely to act as an important resistance area in the coming days and the trading range of Rs 73 to Rs 74.25 per USD can be expected. The break of 73 level could further strengthen the bears till Rs 72.70 per USD.
Instead of a weak structure in the daily frame, the downside from the current levels looks limited and the currency pair could go sideways for the next few days as the prices are trading near the long term support zone. The medium-term moving averages in the weekly time frame also suggests that base building exercise can be seen in currency pair in the next few weeks. The momentum indicators are bouncing back from the important support zone.
To put the things into perspective, traders can expect weakness in the short term but the phase of consolidation is likely in the medium term and the level of Rs 72 per USD can act as a medium term base.
FII data and fundamental triggers
No major activity was seen as far as foreign institutional investors are concerned and the mild outflow of Rs 8.36 crore was witnessed in the last week. The outflow of approximately Rs 412 crore was seen in the month of September till now.
The US unemployment claim data which measures the number of people claim for unemployment benefits for the first time has came higher than expected. Against the estimate of 8,50,000, the actual figure came out as 8,84,000. The data is likely to have a neutral to a mildly negative impact on USD.
Dollar index analysis
The index gauges the strength of the USD against six major currencies. Traders can expect the sideways move in the coming days and the level of 93.92 is likely to act as a short term resistance level. The RSI has made a range shift and started trading in the sideways zone from the bearish zone and the index is trading above 20 DMA. Traders can expect trading range of 92.9 to 93.92 in the coming days.
Considering the overall setup, it is quite evident that negative bias can be expected in the upcoming trading week and supply pressure at higher levels is expected. To trade the setup, traders can opt for theta depreciating based “ modified bear call spread” where out of the money (OTM) Call option can be sold to gain premium and deep OTM Call option can be bought to hedge the positions. As the limited downside is expected, the short position in the deep OTM Put option can also be initiated in the ratio of 1:2 to reduce the overall costing of the strategy.
Sell USD/INR 74 CE @ 0.0900
Buy USD/INR 74.50 CE @ 0.0225
Sell USD/INR 72.50 PE @ 0.015 (2lots)
Expected profit 0.0975 points (subject to theta decay)
The strategy would be profitable in sideways as well as in mildly negative market. Though the maximum loss is higher (0.4025 points) as compared to the maximum profit but the probability of success is quite high. Considering the positions in short Puts, the profit booking point should be kept at 72.5 per USD.
Note – Option premium mentioned resembles the last traded price as on September 11, for September 18 contract.