The saddest thing in the world is that people are being killed, injured and terrorized to fulfill the political goals of some oppressors. A parallel grief is how the news cycle shifts focus after a while; Last week, for the first time since the start of Putin’s war, I noticed the headline in The Financial Times: Applying for NATO membership in Finland and Sweden first, then the collapse of the DOT and then the problems in China. This, perhaps, suggests that the world, although undoubtedly still terrified of what is happening in Ukraine, is moving forward.
The market, of course, is unethical and ultimately dances to their own tune, and all price cycles, including different (and indefinite) frequencies and amplitudes, move. So, whether the Ukraine trauma continues or not, it is certain that the bull run of the dollar will not last forever. To be sure, the US dollar has been the only game in the city since the onset of the attack, with other global currencies remaining deep underwater — sterling ~ 7%, the euro a little over 6% and the yen about 13%. And when the trend does not take a turn for the worse, the current dollar’s strength may end — or, at the very least, a break.
In particular, the euro is approaching a very strong support line, which began in 2000, almost a year after the euro was born. And while I’m not a technical expert, it seems reasonable to assume that breaking the 20+-year support line would take some real strength. The euro was already in a tailspin due to the effects of the Russian aggression in Europe and the rapid rise in US interest rates, but it seems that many of the effects of the invasion of Europe have already been created. Many, many low prices. Again, in terms of interest rates, there could be something of a lifeline from the ECB, which appears to be raising its interest rates in July for the first time since 2011; There is even talk that they could perform in June. And finally, it is hard to believe that the ECB will not take out all the guns burning in defense if the euro-dollar parity is threatened.
So, it is possible that the dollar could take a break. However, this does not necessarily translate into too much comfort for the rupee, which is being driven by the growing black cloud of global sentiment. Although the Russian aggression is part of this cloud, the biggest strength in my view is that the market has finally awakened to the fact that the Fed was, is and remains behind the inflation curve. Since the market gained knowledge about this about six months ago, equities have been in near-free fall — Dow about 17%, NASDAQ an incredible 40% and even our domestically protected Sensex has fallen about 15% over the last six months.
As foreign investors are raising capital, our reserves have shrunk by about 9% since the trauma began. The real picture of the RBI’s heroic support efforts, however, is that in addition to the spot (which affects reported reserves), large sums of dollars have been sold to push premiums down considerably.
So, whether the dollar moves or not, it argues that the pressure on the rupee will continue as long as global markets remain in a state of panic. The big question, of course, is when will the route end? And, importantly, where will the market be when it happens?
A classic market clich হল is that the market will only turn around when there is no one who believes it is going to stop falling. And while no one is talking about buying on Dips (indicating some positivity), the price action is still four days into May, when the Dow has risen more than 1%, suggesting that the shake is not over.
Although each crisis has its own origins, we must pray that it does not become as terrible as the last two: in 2008, the Dow fell more than 50% and the market took more than 4 years to reach its previous peak; In 2020 (Covid), the Dow fell more than a third, but it regained its previous peak in less than a year.
The rupee, held hostage as sentiment, will remain on the ropes until the global market collapses, but with the RBI clearly playing for war, the rupee’s losses could be relatively limited.
The author is the CEO, McLean Financial