Oh no, not again — another history lesson: Follow a systematic process for hedging your risk

By: |
December 31, 2020 5:15 AM

Since 2014, the periods of strength have been shorter (354 days, on average) as compared to the period between 2006 and 2014 (502 days); correspondingly, the periods of weakness have been longer—the average since 2014 was 451 days, as compared with 364 days earlier.

"The vaccine optimism will stay but next catalyst for the market is US Georgia runoffs, a Democratic sweep will mean expansionary Biden policy but if Republicans win then they would provide a check on policies.

As we all know, history never repeats itself; and I am extremely fond of saying that the most important thing about yesterday is that it’s over. Nonetheless, as the year turns, it would at least be curious to look at what the rupee has done over the past 15 or so years to see if we could come up with—heaven forbid—a long-term forecast.

Everyone is familiar with the stop-start process of rupee movement as it has fallen from around 39 to the dollar in 2008 to over 73 today. While at a high level the path has remained more or less the same, with periods of sharp rupee weakness alternating with periods of strength, the tempo of the process appears to have changed.

Since 2014, the periods of strength have been shorter (354 days, on average) as compared to the period between 2006 and 2014 (502 days); correspondingly, the periods of weakness have been longer—the average since 2014 was 451 days, as compared with 364 days earlier. Also, the rupee has been less volatile—average gains were 6.46 in the recent period, as compared to 7.03; average losses have been just 9.36, as compared to a huge 14.09. Given that the rupee has been steadily weakening, the percentage moves have become even smaller. Clearly, this is a tribute to RBI’s improved intervention skills over the years and, no doubt, also reflects the lower forward premiums as the market has come much closer to interest parity.

Currently, the rupee has strengthened by a little over 3 rupees since its last low in April 2020. Eschewing any fundamental thinking in favour of the belief (?) that history can provide some pointers to the future, the next cycle for the rupee would play out thus (see graphics).

The target high is not much different than many analyst forecasts, except it is projected to come much sooner—note that only a fool forecasts both a date and a rate, and an even bigger fool forecasts these out to the medium term. But then, foolishness—actually, its friendlier brother, silliness—is my stock in trade. So, pay little (or no) attention to the numbers above and follow a systematic process for hedging your risk.

Happy New Year!

The author is CEO, Mecklai Financial

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