Nifty / USDINR - Does news / events drive Stock & Currency markets?

By Waves Strategy Advisors, For more information on daily research reports, write to us at helpdesk@wavesstrategy.com or visit www.wavesstrategy.com

The Financial Express: “The Reserve Bank on Monday evening announced a slew of measures like raising cost of borrowing by banks by 2 per cent to 10.25 per cent and announcing sale of bonds worth Rs 12,000 crore through open market operations to suck liquidity to check rupee slide.”

                                 

RBI’s sudden action in order to check Rupee slide looks to be more of an impulsive action resulting Rupee to appreciate to a level just seen 2 trading day’s back i.e. on 11^th July itself we can see a low of 59.38 and yesterday Rupee closed near this level only. The desperate step taken by central bank does not look to be of much use for USDINR. Indian currency after sharp depreciation has already been appreciating from 61 levels. The action looks to be contradicting the previous stand where RBI has reduced repo rate since Jan 2013 except for last time. History shows that Government’s action only extends the problem rather than solving it. In short, USDINR trend has been down from 61 levels since 8^th July and we have been expecting 58 to 57 levels for this downside correction. Indian markets reacted sharply lower and had a Gap down opening of almost 100 points near 5930 levels.

Nifty 60 mins chart:

In today’s morning equity research report “The Financial Waves STU” we mentioned that:

Nifty stayed below 6000 level during major part of the day but during final hour of trading managed to sustain above 6000 and closed near day’s high at 6040. As previously expected the 2 days correction on downside was only wave x and prices have now started the next minor leg on upside in the form of wave a of second correction.

Food for thought is that RBI action produced short term spike on downside that lasted for 2 days and prices are now at level where it closed prior to RBI event. Also USDINR is at the level where it was before. The entire activity by central bank looks to be of no use but only increased short term volatility making it more challenging for a trader or investor. This is exactly the reason why we say that event can produce short term spikes or reaction that can last for few mins or few days or few weeks and eventually the original trend resumes! In the entire fall of 2008 government worldwide constantly took steps to avoid the selloff by banning short selling, reducing interest rates and finally giving QE1. Each of the action produced few days of upside reversal but the trend resumed on downside. The change in trend happened only when it was due and then the credit was given to FED that failed miserably when DJIA (US) moved from 14000 to 6500. Similarly Japanese central bank has been intervening many times to depreciate Yen for more than 2 decades but it only increased short term volatility and USDJPY continued its downtrend with only intermittent uptrend.

The only objective tool that helps us to trade systematically is using Elliott Wave theory. Reacting on news is simply trading randomly. If stock market worked on simple logics then making money would not have been difficult. Subscribe to “The Financial Waves STU” and get insight into how simple channels are also working very well along with Elliott wave technique to get the direction of markets.

By Waves Strategy Advisors, For more information on daily research reports, write to us at helpdesk@wavesstrategy.com or visit www.wavesstrategy.com