Thursday, 5 September 2013

Random Inferences on correlation between INR/USD and Market trends

Today, an interesting thing happened. I accidentally misunderstood my friend's statement while he sent me this:

About NIFTY:
"after touching all-time high of ~6300 in tested highs 2 times...
1) All time high of ~6300 in Jan-2008.
2) bottomed out at 2550 by Jan-mar 2009 (1 1/4 yr from all-time high)
3) Re-tested earlier high ~6200 by Nov-2010 (1 3/4 yr after touching bottom of 2550)
4) Bottomed out at 4500 by Dec-2011 (1 yr from 1st re-test of all-time high)
5) Re-tested earlier high ~6200 by May-2013 ( 1 1/2 yr after testing new bottom of 4500)

He went on to mention: "so here is what i want to say
after jan-2008 all time high
it ttried to test that high twice
and it tested new bottom of 4550 once" 

"so i believ e next on the card is 2nd re-test of bottom of 4500
jan-08 (high) -> mar-09 (low) -> nov-10 (high) -> dec-11 (low) -> may-13 (high) -> by april-14 or election time (low) ?????"

I was busy on a few other things and I saw this quickly and misunderstood. I was sort of taken aback and asked him what the Rupee value was at these times for him to be so confident in the prediction. [He was perhaps taken aback at my pointed question too]. However, being the good friend that he is, he started digging into that information... while I wanted to read his statements again to see how he can make arbitrary conclusions, particularly when I know him well and know that he makes good considered assumptions and forecasts.
On re-checking: Stupid of me... he meant "re-tested" I assumed it was "Rupee tested". Error on my side.

However, serendipity struck. Why not superimpose how INR has performed over the shame same time in the market? Currency vs Equity over 4 yrs, if you like. I told him everything - my mistaken understanding, the logic of comparing both together and making observations on them and such.

here is our understanding and analysis so far:

"21-jan-08 (New high) 39.35
02-mar-09 (earlier bottom) 52.46
09-mar-09 52.05
08-nov-10 (1st test of new high) 44.31
26-nov-10 45.83
01-dec-11 (1st test of new bottom) 51.45
30-dec-11 53.06
01-may-13 (2nd test of new high) 53.67
31-may-13 56.50

 after touching all-time high of ~6300 in tested hight 2 times...
1) All time high of ~6300 in Jan-2008.
2) bottomed out at 2550 by Jan-mar 2009 (1 1/4 yr from all-time high)
3) Re-tested earlier high ~6200 by Nov-2010 (1 3/4 yr after touching bottom of 2550)
4) Bottomed out at 4500 by Dec-2011 (1 yr from 1st re-test of all-time high)
5) Re-tested earlier high ~6200 by May-2013 ( 1 1/2 yr after testing new bottom of 4500)"

Mmh. Interesting. So I we started making a few patterns. 

a. In Jan 08, when mrkt went up - all time high, INR also appreciated [great times. NIFTY and currency +vely correlated. good egg.]. Rupee at 39ish
b. Between Jan-Mar 09, when mrkt went down - bottom, INR depreciated. [Again +ve correlation. So far so good]. Rupee between 49-52. 
c. In Nov '10 again markets went up. Retesting the earlier high. Again... INR also appreciated [great times. NIFTY and currency +vely correlated. good egg.] Rupee between 43-45
d. In Dec '11, market retested the bottom[4624]. About 27% bottom from Nov 10 highs[6312] [Yet Again +ve correlation. So far so good] Rupee between 51-53.
e. May-july '13 mrkts retesting highs. about 6.2k. Where is the INR? Between 53-59.5ish. Coorelation between market performance and INR/USD broken. Successfully. Kaput. 

Link for someone who wants to see it for themselves: 

CNX Nifty

Why has this happened?

I can think of these things:

a. Indian Institutional Investors have perhaps been taking the place of FII's as net buyers. It means they need to buy in far excess of what the FII's sell [hot money is moving out of EM's to safety. Besides, UST yields have gone up decently... why risk it on risky assets if risk free option has gone up significantly?]
b. Ceteris paribus, its possible that the depreciation of the INR is also to do with the policy paralysis and lack of reforms and infrastructure. What changed over the last 5 years for the correlation to be broken. It seems to be statistically significant. 
c. Fed Taper - as mentioned in pt a, Fed taper is leading hot-money to rush out of EM's quickly. This leads to 
1. market correction
2. USD/INR exchange distortion

Though pt 2 has happened, pt 1 seems to have been countered [markets were at a high at the same time]... which does seem non-intuitive compared to what happened in the earlier cases. It leads me to believe that there has been some influence by the Indian Institutional Investors somewhere [I havent checked yet... but it will be instructive and educative to check the same]

d. Did commodity markets explode to add more pressure on the currency? Anecdotal evidence doesnt seem to point in that direction.

e. Black money coming in and push for a favorable rate? There were interesting links which mentioned how INR always depreciated before elections in thelast 20 years except in 2k4 when BJP was in power ["India shining" time] Likely. Most likely too. 

Updates: Been checking on this from time to time. I plan to keep updating this for my own analysis:
Sep 6th: Saw a few news reports that FII's are still investing. They are buying more now that the market seems quite oversold. Mmh. Interesting and critical data point. 
Sep 6th: One more. Good link. I dont agree with Jeffries analysis though. They conclude that if CAD comes down by 3%, GDP growth will lower to sub 1-2%. Mmh, remember this. Besides, its not as if the import dependent industries will actually stop importing - if they need to survive, they will do the minimum required imports that makes them meet their margins [there is no imports embargo for such a drastic assumption by Jeffries, lets remember]

Sep 18th: I see. This is something to take note of. Hot money stays sticky in India thro' Reuters. So, corporates are lucky that way. Fortunate... very much so. 
Interesting, our exports print was positive too. I dont know by how much it can keep growing though... thanks to the points I mention below [poor capacity addition, poor infrastructure etc]

Sadly: even with such depressed rates, with our existing decripit infrastructure, its not as if we can exploit the situation to have a significant jump in exports. it might be substantial but full advantage cant be taken. Again, poor infrastructure, lack of clarity wrt future trends makes it difficult for companies to do diligent forecasting which leads to lesser investment in capacity addition leading to lower / reduced capital expenditure leading to reduced inventory... the loop feeds on itself and makes itself more vicious. 

India needs to move on. We need adults in power. not 80 year old teenagers who refuse to govern... or speak up. Neither do we need ministers who vaguely point fingers on their predecessors for the current mess we are in. [Ironic, Pranab cant even speak up on that aspect now, now that he is a President and dons a non-political role]

Sad days.