FX INSIGHT 17 March 2014
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ANZ RESEARCH FX INSIGHT 17 March 2014 INR: 24 WEDDINGS AND AN ELECTION Historically, the INR tends to show significant inflation and improvement in the current account are opposing directional trends before and during the no doubt also providing support to the currency. election period. FIGURE 1. OUTPERFORMANCE OF INDIAN CURRENCY Coincidentally, the election period for this year AND EQUITIES (%-PT CUMULATIVE DIFFERENCE) overlaps into May, a month where the INR has 8 shown a seasonal tendency to depreciate, 7 associated with May’s peak Indian wedding 6 season. 5 4 This year, there will be a rare coincidence of a 3 high number of auspicious wedding dates (24 in 2 total) over a two month period, exacerbating the 1 0 May seasonal effects. -1 Hence, we see scope for increased INR volatility in -2 1 Jan 11 Jan 21 Jan 31 Jan 10 Feb 20 Feb 2 Mar 12 Mar the coming months, and prefer buying volatility INR vs rest of Asian currencies Sensex vs MSCI Asia ex Japan Index rather than taking an outright currency exposure. Source: Bloomberg, ANZ Research We recommend buying a 3m USD/INR ATMF straddle, at 10.8% volatility (forward reference Rupee strength heading into the election is not 62.42). We target 13.3% with stop-loss at 10.2%. unusual. Indeed, contrary to popular perception, we find that INR tends to rally more often than not in the lead-up to the voting period. In Figure 2, we THE ELECTION RUN-UP RALLY… show how INR has performed against the USD, and India’s general election to elect the 16th Lok Sabha also relative to other Asian currencies during will be held from 7 April to 12 May, with the results different stages of the election period. declared on 16 May. Our economists have covered FIGURE 2. INR PERFORMANCE DURING PAST how the Indian political cycle will impact the ELECTION PERIODS economic cycle in a recent publication.1 Our main Election Year 2009 2004 1999 1998 1996 interest in this note is how the Indian rupee will Governing coalition: UPA UPA NDA NDA UF respond in the lead-up to, and following the election results. INR performance vs USD 30 days to start of voting 3.5% 2.8% -0.1% 3.2% -0.5% Current poll surveys show the National Democratic Voting period 0.1% -2.4% -0.2% -0.9% -2.1% Alliance (NDA), led by the Bharatiya Janata Party 30 days after end of voting 4.4% 0.1% 0.4% -0.8% -0.1% (BJP), in the lead ahead of the incumbent United INR relative to other Asian currencies Progressive Alliance (UPA), which is led by the Indian 30 days to start of voting 0.5% 2.5% 1.9% 2.7% -0.9% National Congress (INC). If the election results Voting period -2.6% -0.7% -0.1% -2.7% -1.7% reflect the poll surveys, that would mean a change in 30 days after end of voting 3.9% 0.1% -1.7% -9.1% 0.1% government after two terms of UPA rule. Source: Election Commission of India, Bloomberg, ANZ Research The general market perception is that a BJP-led coalition will be more business friendly, and hence We focused on the elections after the market positive for Indian assets. However, much of this is determined exchange rate regime was introduced. already in the price. The INR is the third best Hence, our analysis covers five elections. We find performing Asian currency year-to-date with a gain that: of 1.0%. The relative movement in the Sensex is While INR’s performance against the USD has more impressive, with a 7.3 percentage point been mixed in the 30 days leading up to the first outperformance over the MSCI Asia ex Japan Index voting day, gains have tended to be strong while for the year-to-date (see Figure 1). An easing in CPI losses are more muted. INR outperformed other Asian currencies in the election lead-up in all cases except for 1996. 1 See Asia Insight: Political and Economic Cycles Cross in Asia, 11 March 2014. FX Insight / 17 March 2014 / 2 of 5 During the voting period, which has varied from 7 imports were imposed. This saw a sharp fall in gold to 33 days (and is 35 days for this year’s imports (see Figure 4). However, there is speculation election), INR has tended to depreciate against that there could be some easing in import the USD, and underperform regional currencies. restrictions, with India’s trade minister raising the issue with the finance ministry. Finance Minister Performance in the 30 days after the end of P Chidambaram has indicated that the government voting is mixed. The strong rally in INR after the will review the decision after getting final figures of 2009 election was unusual. Earlier periods tended the fiscal year’s current account deficit. We think it is to see the rupee move in line or underperform unlikely that any decision will be made before the other Asian currencies. election. But if we do get an easing in restrictions prior to or shortly after the start of the peak wedding … UP AGAINST AN EXTENDED INDIAN season, we can expect a strong lift in imports, and a WEDDING SEASON likely weakening of INR. While it is tempting to try and extrapolate 2009’s FIGURE 4. INDIAN GOLD IMPORT VOLUMES RISES IN post-election rally in INR, particularly if the BJP do THE MONTH OF MAY secure a strong mandate to govern, we caution against expecting more gains in the currency. This is 6 because the election results are announced at the 5 start of what will be an extended Indian wedding season. 4 We have written before about the tendency for INR 3 to depreciate during the month of May, linking this 2 effect to the number of auspicious days for Indian weddings, which typically sees a rise in gold demand 1 and other associated spending (See INR: Indian 0 weddings and the impact on rupee, 9 May 2013). 03 04 05 06 07 08 09 10 11 12 13 14 Gold import volumes (million oz) The month of May tends to have the highest number of auspicious wedding days. This year is no exception Source: Haver, Bloomberg, ANZ Research with 12 auspicious days. However, what is unusual in 2014 is that there are also 12 auspicious days in June, almost double the historical average (see INVESTMENT IMPLICATIONS Figure 3). With 24 auspicious wedding days over two If the INR’s past behaviour during election periods is months, we are set for an extended Indian wedding any guide, we can expect further strength in the season this year. currency as we head closer to the start of voting. But some INR weakness could result during the actual FIGURE 3. 24 AUSPICIOUS INDIAN WEDDING DAYS voting period, which lasts for 35 days. It is during IN MAY AND JUNE COMBINED this time that INR has tended to underperform other 14 Asian currencies. 12 If the election results go according to current poll 10 surveys, a BJP win may see a post-election rally in 8 the currency, but this will be dependent on the strength of their mandate and how much support 6 they require from other regional parties. However, 4 the month of May tends to see a weakening in the 2 INR, which could extend this year due to a longer 0 than usual Indian wedding season. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average auspicious days in the month since 2000 Number of auspicious days in 2014 Source: www.drikpanchang.com, ANZ Research The extent of the wedding effect on INR this year rests on whether there is any easing in gold import restrictions. Last year, in an attempt to curb the country’s current account deficit, restrictions on gold FX Insight / 17 March 2014 / 3 of 5 FIGURE 5. USD/INR REALISED VOLATILITY 20 18 16 14 12 10 8 6 4 2 0 96 98 00 02 04 06 08 10 12 14 Voting period USD/INR 3m realised volatility Source: Election Commission of India, Bloomberg, ANZ Research What we can reasonably expect from 24 auspicious wedding days and an election is that currency volatility will likely rise. As Figure 5 shows, realised volatility tends to pick up going into the voting period. Hence, on a risk-reward basis, we prefer to buy volatility instead of taking an outright INR position. Therefore, we recommend buying 3m USD/INR ATMF straddle, at 10.8% volatility (forward reference 62.42). We target 13.3% with stop-loss at 10.2%. The 3m tenor will cover the full election period and most of the extended wedding season. Khoon Goh Senior FX Strategist +65 6681 8933 HuiYing Chan FX Strategist +65 6681 8715 FX Insight / 17 March 2014 / 4 of 5 IMPORTANT NOTICE The distribution of this document or streaming of this video broadcast (as applicable, “publication”) may be restricted by law in certain jurisdictions. Persons who receive this publication must inform themselves about and observe all relevant restrictions. 1. 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