Bears likely to have upper hand in USD/INR trade, deploy Protective Call strategy

Manish Srivastava

United States Dollar/Indian Rupee (USD/INR) has continued trading with a negative bias in the last few days. The initial weakness in the last trading week was followed by a mild pullback and the currency pair closed with a loss of 12 paise on a weekly basis at 74.90 per USD approximately.

The lower top and lower bottom cycle on a daily chart is still intact and reflecting an inevitable selling pressure on every rise. Traders can expect the sideways move with a bearish bias to continue even in the forthcoming trading week. Prices are trading below major short term and medium term moving averages and the momentum indicators are also trading in a sideways zone. The declining trend line originated from joining the recent highs of 14th July and 3rd August is likely to act as important resistance for the prices in the coming days.

On the other hand, the low of Doji pattern (74.48) formed on July 6, 2020 will act as a major support level. The scenario suggests that the currency pair is expected to trade in the range of Rs 75.25 to 74.48 per US Dollar with a negative bias in the next few days. The price movement in the last few days has taken the shape of a triangle pattern with a neckline at 74.55 but to avoid the whipsaws, traders should consider the level of 74.45 as a pattern breakdown level where the Doji support will also be traded on downside. The overall setup is reflecting two probable trading scenarios which could shape up in an upcoming week:
- Firstly, the prices could continue to trade sideways and move in the range of Rs 75.25 to 74.45 per US Dollar with negative bias

- Secondly, a fresh round of selling is likely to take place if support level of Rs74.45 per US Dollar trades on the lower side, which could open the gate for bears till 73.5 and 73 levels in the currency pair.

USD/INR SPOT

Taking the clue from the intraday time frame, the candle with long upper shadow at upper Bollinger band on hourly chart providing an initial signal that pullback is losing momentum and bears can take the charge again.

Fundamental Triggers & FIIs Data

India's trade deficit data has narrowed to $4.83 billion in the month of July 2020 as compared to the deficit of $13.43 billion in the same month last year. Data is reflecting the improvement in the current account and is likely to result in maintaining the strength of INR against USD in the coming days.

The inflow of more than Rs 2,130 crore from FIIs is providing a further cushion to Indian Rupee.

Dollar Index Analysis

The dollar index, which represents the strength of the US Dollar against six major currencies of the world, has gone sideways after breaking the major support level of 93.80. The Bearish Engulfing pattern on August 12th after a mild pullback suggesting that underperformance is likely to continue in the coming days. The impact of fall of more than 5 percent in the index in month of July has not reflected in Indian Rupee till now and as a result, we can expect strength in INR in the coming days.

Trading Strategy

Considering the overall setup, it's quite evident that bears are likely to have upper hand in the currency pair in a forthcoming trading week. We believe that "protective Call' could be an apt strategy to trade the current setup where short positions in the future can be initiated along with long positions in the Call option.

Sell USD/INR futures @ 75.02 per USD
Buy USD/INR 75.25 CE @ 0.07
Profit booking points - 74.55 & 74.10
Expected profit - 85 paise (subject to theta decay)

Maximum loss - 30 paise

The strategy would enable the traders to capture the expected downside with limited risk.

Note - Option premium resembles the last traded price as on August 14 for the August 21 contract. The closing price is taken as per spot levels at 20:30 hours IST on August 14.

The author is Senior Technical Analyst (Equity & Currency) at Rudra Shares & Stock Brokers Ltd. (SEBI Reg.No.INH100002524).

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