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| Edited By: Bhaskar Panda |Source: DNA |Updated: Nov 26, 2018, 05:55 AM IST
The saying goes, "good things do not last forever as all good things must end". The vice versa is also equally true. The dollar index was on the "up" last month and so was the global crude oil prices. If we toss some of the uncertainties faced by Europe and also mix little worries streaming out of Great Britain, we get a combination, that can confound anyone.
The sharp movement in the global crude oil prices has taken everyone by surprise. For example, Brent Crude prices moved from $44.35 per barrel in June 2017 to touch a high of $86.74 in the month of October 2018. Upward movement in the crude prices also depended a bit on negative news flows.
Trump administration's decision to put Iran under sanction was one of the moot points of the oil rally as fear for undersupply was getting played out. The dilution of the same by allowing some large consumer countries to continue to import oil from Iran, estimates of lower consumption by key oil consumers and stepping up of shell oil production did have a big impact on oil prices.
Whatever the case may be, a sharp turnaround in global oil prices from a high of $86.74 per barrel in October 2018 to $61.71 per barrel in mid-November is too dramatic to be ignored by the big consumer countries which include India. This has been by far the most visible driver for a turn-around in many oil consuming current account deficit economies like India. Looking technically into the oil, we might have come to a point where oil prices may remain range-bound and may even actually bounce back a little bit. In that sense, we have to keep a close watch on $60.49 per barrel as a solid support which also happens to be a FIBO level as well.
As I had mentioned in my opening paragraph, the dollar index has moved lower as well. But the movement in the dollar was a little more sanguine in comparison to movement in global crude oil prices. Europe has now been looking for answers to the problems in their backyard. Italy's stand on budget deficits and fluctuating fortunes on the closure of a "Brexit" negotiation deal, has been weighing down both euro and pound. While euro seems to have found a solid footing around 1.1400 levels, it's difficult to gauge how pound will react in the weeks to come. One has to possibly work with a wider range in a pound-dollar pair.
The sharp turnaround in the global crude oil prices which meant that India's import burden in dollar terms will reduce to that extent did bring in a fresh perspective to consider while taking a view on a dollar-rupee pair. The fact that the US-China trade war was not escalating and the fact that the US administration exempted India from the ban for buying oil from Iran also helped boost rupee against dollar.
The interest rates in India have remained relatively stable at higher band offering good returns. At the same time, the US interest rate seems to be moving slowly towards its peak. This could be another reason why India has attracted healthy positive investments in the month of November. After months of negative flows, we have already seen positive inflows to the tune of $1.6 billion till November 20, 2018, both in equity as well as debt markets.
As I had anticipated and had earlier mentioned, the area around 74.50 proved difficult to breach on the upside. The result is that there has been a sharp bounce below. The rally from 63.2450 in January 2018 to 74.4850 in October 2018 has stalled. The downward pressure is now pulling dollar-rupee below trend line support which is at 71.3300 levels. It's possible that the pair might still go down further and the technical level which will prove difficult comes in at 70.1600. Readers may take their call accordingly.
The writer is senior regional head, treasury advisory group, HDFC Bank
