Bears likely to continue having an upper hand in USD/INR; deploy 'modified bear call spread'

Manish Srivastava

Sleeping giants took a turn and bears grabbed the United States Dollar/Indian Rupee (USD/INR).

Sudden fall in the currency pair during last week has left traders leaped out of their skin. The fall of more than 95 paise over the week resulted in panic among the bulls and the currency pair finally closed far below the 75 mark at 74.636 per US dollar.

The exchange rate of 74.90 per US dollar was acting as major support since April 2020 which has broken on downside in the week. The consolidation of three months in the currency pair finally seems to be favouring the bears and negative bias is expected to continue in coming trading sessions as well.

The sideways movement in the last few months has taken the shape of a triangle pattern which has eventually broken down on Thursday's trading session.

Apart from this, RSI was holding the sideways zone with a positive bias since the beginning of 2020 and has started trading in the bearish zone for the first time in last week. Downward sloping moving averages indicating the bears could continue having an upper hand in the coming days and selling pressure on every rise will not be ruled out.

USD/INR DAILY (CASH)

Triangle breakdown pattern is suggesting the target of 73 per USD in the medium term but for a forthcoming trading week, we can expect the currency pair to trade in the range of 75.10 to 74.35 per USD with negative bias.

The 74.50 acted as a breakout level when the currency pair extended its upmove in March 2020 and now, it is approaching the same level again for the first time which could provide mild support to the prices for the time being. The next expected leg of down move could take place after mild consolidation.

FIIs activity and fundamental triggers

The previous week witnessed a net outflow of more than Rs 5,333 crore but the INR still appreciated against USD. Other triggers like Open market operation by the Reserve Bank of India (RBI) on July 2 and a current account of India turning into surplus in Q4 for the first time after more than 10 years has played the important role in INR appreciation.

Surplus of $0.6 billion in Q4 FY20 against the negative figure of $4.6 billion in Q4FY19 has boosted the INR sentiments and has offset the negative impact of foreign institutional investor's figures. The scenario helped the Indian Rupee to appreciate not even against USD but also against other major currencies like Euro and British Pound (GBP). Thus, INR appreciated more than 1 percent and 0.2 percent against Euro and GBP respectively on weekly basis.

Trading strategy

Considering the overall structure, it is quite evident that bias is likely to continue on the downside and any rise in price should be taken as a retracement in the territory of bears.

Traders can trade the scenario by deploying 'Bear Call Spread' with slight modifications where OTM Call option can be sold and Call option of higher strike price can be bought to cap the risk. To finance the long Call, traders can sell deep OTM CE in the ratio of 1:2.

Expected gain - 0.0875 points (subject to theta decay)

The strategy would enable the traders to trade the setup with limited risk. Though the maximum risk (0.1625) is slightly higher as compared to the expected profit, the probability of gain is quite high in strategy.

Note: Option price resembles the last traded price as on July 3, 2020 for the July 10, contract. Closing price is taken as per spot levels at 20:30 hours IST on July 3, 2020.

(The author is Technical Analyst (equity & currency) at Rudra Shares & Stock Brokers.)