'Bears likely to make a comeback in USD/INR; deploy theta depreciating bear call spread'

Manish Srivastava

The United States Dollar/Indian Rupee (USD/INR) remained subdued throughout the week and closed with a weekly gain of approximately 16 paise, at 74.92 per US dollar. Bulls pushed the currency pair towards its 20-day simple moving average but failed above it and the trade went sideways.

The structure is quite weak and negative bias can be expected in the upcoming week. Prices are trading with lower top and lower bottom cycle and in recent gyration, the currency pair formed a 'Hanging Man' candlestick formation on July 29 at its 20 DMA, which is placed at 74.91 level. The candle indicates volatility on a particular day where prices recover from lower levels and close with long lower shadow. The pattern usually forms after mild retracement and indicates the resumption of an original trend, which, in this case, is a downtrend.

Apart from this, the currency pair failed to take out the resistance of a falling trend line which has originated by connecting the recent highs of June 18 and July 14. The medium-term moving averages ribbon is trading with a bearish curve which suggests that the supply pressure can not be ruled out on every rise. Triangle breakdown pattern IS indicating that prices are likely to move towards 73 per US dollar gradually.USD/INR DAILY (SPOT)

In the forthcoming week, traders can expect the exchange rate of 74.52 and 73.98 as momentum indicators are going through the phase of bearish crossover and prices are on the verge of breaking down from bearish flag pattern. The volatility indicators are trading with squeezed bands on intraday charts and suggesting that bears could take the charge once again. The selling setup will remain intact until the currency pair is trading below Rs 75.25 per USD.

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FIIs Data and Fundamental Triggers

Subdued activity was witnessed throughout the week from Foreign Institutional Investors except on Friday's trading session where the outflow of more than Rs 958 crore was seen. The total outflow during this week surpassed the figure of Rs 1, 300 crore. Although, the data is likely to have a neutral effect on currency pair.

The COVID-19 pandemic is showing no sign of mercy on the US economy as unemployment claim data released shows that the number of Americans who filed for unemployment benefits rose again week-on-week. A total of 1.4 million people filed the unemployment claim for the first time last week. Apart from it, the US GDP contracted by 32.9 percent in April to June quarter. With the fear of escalation in COVID-19 cases, the negative impact can also be expected in Q3 figures and the US dollar could continue to trade with negative bias.

Dollar Index Analysis

The dollar index gauges the strength of USD against six major currencies of the world. The index has breached the important support level of 93.80 and is trading below the low of September 2018. Currently, the index is trading at the level of 93.30 and this major weakness of USD against various currencies has not reflected in USD/INR pair till now. Keeping in view the overall structure, the currency pair could show significant weakness in the short to medium term.

Trading Strategy

Considering the overall structure, the negative bias in the currency pair is quite apparent. The bearish dominance is likely to remain intact and sell on every rise is expected until the currency pair is trading below the level of Rs75.25 per Dollar. Traders can trade the setup by deploying simple “Bear Call spread” where OTM call option can be sold to gain premium amount in the form of theta decay and deep OTM call option can be bought to hedge the positions.

Sell USD/INR 75.25 CE @ 0.070
Buy USD/INR 75.75 CE @ 0.0175

The strategy seems apt to trade the current scenario and could provide the maximum gain of up to 0.0525 points with limited risk.

Note - Options premium mentioned resembles the last traded price as on July 31, 2020, for the August 7 contract. The closing price is taken as per spot level at 20:30 hours IST on July 31, 2020. CMP of Dollar Index is taken as per spot level at 23:00 hours IST on July 31.

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

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