Monday Morning Rupee / Gold trade events

Over the weekend I was meeting my friends who are gold and silver traders in Multi Commodity Exchange of India (MCX). One thing they told me that they were unable to cope with the current volatility in gold and silver. Since all of them are positional traders they incurred losses as they were long in gold and silver. Gold had risen in dollar terms but they did not factor Indian rupee’s appreciation before deciding on their traders as a result despite gold’s rise in US dollar terms gold and silver fell in MCX in April to June quarter. This is the second phase of the commodity Bull Run which primarily began in 2002 and is characterized by greater volatility and consolidation. How come consolidation? Gold near dated futures have been trading in wider $600-$700 over the past one year and silver in wider $963-$1450. Either one should be a day trader or a positional traders. If you keep on switching sides, the probability of loss increases multi fold. How? Intra trader uses strict stop losses equal to two to three percent and does not leave any position open whereas positional traders needs to keep a stop losses of atleast fifteen percent. In Intra day trades losses is limited and one is not at the mercy of next day market semantics. The same trader is a bull in one day and the next day a bear. Positional traders cannot make such a move. There are various hedging techniques to minimize risk, which also have a cost involved. One has to decide his style of investment (positional or day trades) before investing. If you do not decide then you will only float in the river and will never to able to swim to either shore. This is just yet another reminder of the trading strategy so that losses are minimized. I am writing this as we are getting mails and calls on how to deal with silver long positions. There are lot of investors who are long in MCX silver between INR 19,00 and INR 20,000. Then there is the rollover cost which increases the purchase price.

Dollar / Rupee / Gold 3 way Trade continues

Copper and silver futures expiry is now over. The Fed meeting is now over. The major event risk is over. This is shortened trading week due to US Independence day holidays. Volumes will reduce in the first half of the week. It will be another volatile week due to June payroll numbers on Friday. The US dollar has been on a steady decline before and after the Fed meeting. Key technical support for the US dollar Index is likely to be tested this week.

Individuals planning to spend large sums of foreign exchange on overseas travel or education may soon be able to hedge against currency fluctuation risks.

The Reserve Bank of India (RBI) has already set up an internal working group for examining issues related to the launch of currency futures in India. Yen / Euro traders look for a resurgence in the Rupee and the Yuan going forward. Although the impact on exports from India are starting to feel the heat.

RBI has asked MNC banks to make presentations, highlighting the feasibility of such products in India. A senior treasury manager with a multinational bank said, “The central bank is of the opinion that banks would find it difficult to cater to individuals’ demand for such products. Hence, it could be better if individuals themselves are allowed to trade in currency futures.”

Besides individuals, RBI is looking at allowing corporates and mutual funds to trade in currency futures. A currency future is a derivative contract to exchange one currency for another at a specified future date. The price would be the exchange rate prevailing on the last trading date. Typically, the US dollar is involved in the transaction.

A private bank official said, “This could serve as the groundwork for moving towards making the rupee fully convertible, which would happen sooner than expected. Initially, RBI may allow exporters and importers to trade in this instrument.” This could give such players a third route to hedge risks.

At present, there are two ways through which exporters and importers can seek a hedge against volatile currency movements—one, by way of forward cover and two, via the option route. AV Rajwade, member of the committee for fuller capital account convertibility and a well-known currency strategist, said, “It is an extremely positive move.

A currency future is no different from a forward contract, only that in case of the former, the amount and maturity of the contract is standardised. However, for this to work in India, the RBI may have to allow even speculative trade and cannot insist on the contract to be accompanied by an underlying commercial exposure.”

He explained further that the fact that the rupee is not yet fully convertible, may not cause much of an issue, as settlements would be rupee-denominated and the reference rate would be linked to the ones issued by the RBI.

Mr Rajwade pointed out that one reason why the central bank could be looking at launching currency futures in India could be because the Dubai Gold and Commodities Exchange launched rupee futures earlier this month.

Hence, investors wanting to trade in the rupee could have alternate ways of doing so and hence, it made better sense to look at introducing such products in India itself.

The Indian Rupee eased to its lowest finish in over a week on Monday, Jun. 25, 2007, with investors paring holdings in the high-yielding local unit as global appetite for risky assets waned, and on Dollar demand from oil refiners. The Rupee closed at 40.8750/8850 a Dollar, slipping from Friday`s 40.77/78 and ending at its weakest since June 14. It has been trading in a 40.50-41.25 range since the central bank knocked it from a nine-year high of 40.28 in late May.

The Indian Rupee recovered from its lowest level in over a week, but still ended weaker on Tuesday, Jun. 26, 2007, as global investors trimmed positions in the high-yielding Rupee on mounting concerns about risky assets. The Rupee ended at 40.9025/9125 a Dollar, easing from Monday`s 40.875/885, but climbing off the intraday low of 41.04.

The Indian Rupee eased on Wednesday, Jun. 27, 2007, on ebbing global appetite for risky assets and month-end Dollar purchases by oil companies, though losses were limited by exporters buying Rupees on the dip. The Rupee ended at 40.9725/9825 a Dollar, slipping from Tuesday`s 40.9025/9125. It tested 41 several times during the session, but never conclusively broke the level.

The Indian Rupee climbed on Thursday, Jun. 28, 2007, buoyed by firming overnight lending rates and as exporters repatriated profits, but gains were limited as traders unwound short Dollar positions to book profits. The Rupee ended at 40.83/84 a Dollar, rising smartly from Wednesday`s 40.9725/9825.

The Indian Rupee closed at its highest level in over a week on Friday, Jun. 29, 2007, as strong foreign inflows hit the market. The Rupee ended at 40.70/71 a Dollar, climbing from Thursday`s 40.83/84 to its strongest finish since June 21.