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The Rupee Looks Poised for a Recovery

A broad rotation is under way, out of the U.S. and back into emerging economies.
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"Recovery begins from the darkest moment."

-- John Major

In a recent interview I did with TheStreet's Lindsey Bell, I discussed the importance of the Indian rupee on gold demand, making the case that should the rupee appreciate as I suspect it will, gold prices will likely follow suit. My reasoning for this relates to the fact that India is one of the largest drivers of gold buying.

As I showed in the article "A Gold Call Is a Rupee Call," the performance of SPDR Gold (GLD) and the performance of the rupee have been nearly indistinguishable for over a year now as the two moved in lockstep. As the rupee has depreciated, it has made gold more expensive to Indian buyers, curtailing demand. Likewise, as the rupee has appreciated, it has made gold less expensive, increasing purchases.

So what happens with the rupee now, given lowered growth estimates by India's finance ministry and the Reserve Bank of India's decision to not lower rates in its most recent policy meeting? Take a look below at the WisdomTree Dreyfus Indian Rupee Fund (ICN) in U.S. dollar-denominated terms. Note that the surge off of the low hit in late June as Indian Prime Minister Manmohan Singh began announcing aggressive reform measures to encourage foreign fund flows into the country and as strong global "risk-on" sentiment took place.

ICN Daily

WisdomTree

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The rupee weakened quite a bit during the October to mid-November period on global risk-off sentiment that occurred on some renewed uncertainty over Greek aid and the U.S. presidential elections. However, that downtrend seems to have abruptly reversed. Note that the trend is unclear now in the very short term.

Having said that, I have noted that there does appear to be a broad rotation under way out of the U.S. and back into emerging economies, which means that independent of growth concerns in India, the rupee likely continues to face upward pressure as money looks for countries which are undergoing market-friendly structural reform. If bullishness on the rupee ends up being the right call, then gold itself could catch a bid from the marginal buyer in India because of its currency-adjusted lower price sparking demand.

Are you bullish on the rupee? Then you're bullish on gold.

At the time of publication, Gayed had no positions in currencies or commodities mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.