US Dollar Analysis - Part 1

Some factors contributing to the strength of the US dollar are:

1. Greece repayments which is keeping pressure on the EURO.
2. Interest Rate scenario in the US. FED is expected to increase interest rates soon.
3. An overall improvement in the US economy since last year.
4. Interest rate scenario in Euro zone and in England.
5. USDX Analysis (US Dollar Index)

Greece is expected to make the next payment in June, which Greece is already refusing to pay. This keeps pressure on the Euro. Currently the Euro made a low of 1.0418 against the dollar in the month of Mar 2015. Due to the Greece situation the Euro is likely to lose strength once again, though I doubt it will make a new low. I would expect Euro to make a low of about 1.0480 or higher and then reverse. However markets have a tendency to take one by surprise and one cant rule out a new low.

Interest Rate Scenario in the US is likely to change as the FED has indicated it will resort to raising interest rates. However for now, OIL prices are low, and the US economy is better but downward pressures still persist. In anticipation of rising interest rates the market has already moved in favor of the US Dollar. I therefore believe that when the FED actually starts hiking interest rates. the US dollar will actually weaken. Traditionally a rule of thumb on the US interest rate hikes is that if the FED hikes interest rates 3 times in a row, the US economy actually enters a recession. 

US economy has improved over the last two years but the recovery is still fragile. Any shock or disturbance could push the economy back again. 

Euro zone is unlikely to hike interest rates for some time. UK has got a full majority government which bodes well for the UK economy but implementing programs to boost the economy will take time and till then the Economy will remain weak. Like the Euro we can expect the Pound to weaken further though the Pound is in a better position then the Euro. I would expect a low of 1.5150 at the most for the Pound.

I would also like to mention the YEN here. I expect at the most 123.80 on the top side for YEN. I don't expect YEN to weaken any further. The Japanese economy has been showing some signs of improvement. The Japanese Economy is expected to continue its strength into the next year. The Japanese Yen is already too weak and a weaker YEN will not make anyone happy. 

US Dollar Index: I expect the US dollar index to test its previous high of 100.32. It might actually make new high. If that happens one can expect all other counters to make new lows.

Summary: To summarize i expect Dollar Strength to continue further to around the third quarter of this year. By the end of the year the trend will reverse. I find the USD looking for a top which means that all other counters should be reversing around the end of the year. 

Currency Analysis - USD/INR (Indian Rupee against US Dollar)

My earlier analysis of 7th Jan 2015 had indicated that i expect the Rupee to get weaker against the US Dollar. Currently the Rupee sits comfortably above 64 Rs against the Dollar. I look at an approximate target of 66 and higher. From that point on, one can look at starting to sell USD and buy Rupee.

My assumptions on the Economic front are based on the fact that the new government in India for the last one year has been working very hard internally on simplifying rules and policies for foreign investment, and at the same time working hard abroad to attract investment. A simplified policy and rules regime, and an active bureaucracy and government bode well for foreign investments. Many contracts have already been signed with various countries and in various sectors. This money will now start flowing into India. The initial flow will be at around Rs. 66 or higher. By initial flow i mean the first 10 to 30 Billion USD would come at around the rate of 66 or so. However the subsequent flows will see the rupee strengthen and will be only at around 58-62 range. Then i see a continuous strengthening in the Rupee for a long time to come. The Rupee will gradually drift and stay between 48 and 52.

The second factor that will contribute to the strengthening Rupee is the return of Black Money. The government has been working on putting laws, agreements and processes in place that will start giving results. Most likely minor results will be achieved by the end of this year 2015. This would have a major psychological impact. As more and more money is recovered from abroad as well as from within the country, the Rupee will strengthen.

India focusing on development and attracting foreign investment and technology will be wanting to have a stronger Rupee which makes the imports cheaper. All major companies in India will want a stronger Rupee and will thus pressurize the government and RBI to keep policies in place that keep the Rupee strong. Paying back loans taken in USD also becomes cheaper if the local currency namely Rupee Strengthens.

To play a stronger regional role India will need a stronger currency and which will reduce dependency on USD.

In addition fundamentals of the Indian economy like inflation, fiscal deficit, budget deficit etc are all on target and government has already achieved them for this year. Strong fundamentals means strong currency.

Lastly technically speaking i am reproducing the chart from 7th Jan below which also indicates that the Rupee will strengthen.

We can see that the 61.8% retracement is at Rs.50.35.