The saddest thing in the world is people being killed, hurt, terrified to fulfil some tyrant’s political goals. A parallel sadness is how the news cycle shifts focus after a period; last week was the first time since the start of Putin’s war that I noticed the lead headline in The Financial Times shifting, first to Finland and Sweden applying for NATO membership, and then to the collapse in the Dow and then to problems in China. This, perhaps, suggests that the world, while doubtless still horrified at what’s happening in Ukraine, is moving on.
Markets, of course, are amoral and ultimately dance to their own tune, and all prices move in cycles albeit with varying (and indeterminate) frequencies and amplitudes. So, whether or not the trauma in Ukraine continues, it is certain that the dollar’s rampaging bull run cannot continue forever. To be sure, with the US dollar having been the only game in town since the invasion began, other global currencies remain deeply underwater—sterling is down ~7%, the Euro a bit over 6% and the yen nearly 13%. And while the trend doesn’t turn till it turns, it is worth looking at the possibility that the current dollar strength may be coming to an end—or, at least, a hiatus.
In particular, the Euro is approaching an extremely strong support line, which began way back in 2000, just about a year after the Euro was born. And while I am no technical expert, it seems only reasonable to assume that breaking through a 20+-year support line would take some real power. The Euro had already been on the mat as a result of the twin forces of the impact of the Russian invasion on Europe and rapidly rising US interest rates, but it does seem likely that much of the impact of the invasion on Europe is already built into the much, much lower price. Again, on the interest rate side, there may be something of a lifeline from the ECB who, it appears, will be raising its interest rates in July for the first time since 2011; there is even talk that they may act in June. And finally, it’s hard to believe that the ECB would not come out all guns blazing in defence if Euro-dollar parity is threatened.
So, it is possible that the dollar may take a pause. However, this doesn’t necessarily translate into too much comfort for the rupee, which is being driven more by increasingly dark clouds of global sentiment. While the Russian invasion is part of this cloud, the larger force, in my view, is that the market appears to have finally awakened to the fact that the Fed was, is and remains way behind the inflation curve. Since the market took cognizance of this about six months ago, equities have been in a near-free-fall—the Dow is down nearly 17%, the NASDAQ an unbelievable 40%, and even our domestically-protected Sensex has lost nearly 15% over the past six months.
As foreign investors have been pulling capital out, our reserves have fallen by around 9% since the start of the trauma. The true picture of RBI’s heroic support efforts is, however, likely much higher since, in addition to spot (which affects the reported reserves), it has also been selling dollars heavily enough in the forwards to push the premiums quite a bit lower.
Thus, irrespective of whether the dollar turns around or not, it stands to reason that the pressure on the rupee will continue as long as global markets are in a funk. The big question, of course, is when will the rout end? And, importantly, where will markets be when it does?
A classic market cliché is that the market will turn only when there is nobody left who believes it is going to stop falling. And while nobody is talking about buying on dips (indicating some positivity), the price action—there have been four days in May so far when the Dow has risen by more than 1%—does suggest that the shakeout is not complete.
While each crisis has its own genesis, we need to pray that this one is not as terrible as the last two— in 2008, the Dow fell by more than 50% and it took over 4 years for the market to reach its earlier peak; in 2020 (Covid), the Dow fell by over a third, but it recovered its earlier peak in under a year.
The rupee, hostage as it is to sentiment, will remain on the ropes till global markets stop falling, but with RBI clearly game for the battle, the rupee’s losses may remain relatively modest.
The author is CEO, Mecklai Financial