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Last Updated : Oct 17, 2020 09:10 AM IST | Source: Moneycontrol.com

USD/INR likely to trade sideways; deploy Short Iron Butterfly next week

The RSI on a weekly chart is bouncing back from significant support levels and prices are trading near 50 periods moving average.

Manish Srivastava

The dilemma of bulls and bears is quite apparent in the United States Dollar and Indian Rupee (USD/INR) as the currency pair continued trading in a sideways zone in the week gone by. The mild gain of approximately 0.37 points has been witnessed on a week-on-week basis.

A bounce back from the lower end of the trading range has been witnessed with the formation of a "Bullish Engulfing" candlestick pattern on the daily chart on October 12, 2020. Though the overall structure is favouring the bears, the sideways movement is likely to continue in the coming days.

In the forthcoming trading week, the currency pair is likely to trade in the range of 72.95 to 73.70 per USD. As the prices are trading below all major short-term and medium-term moving averages, a fresh round of weakness might not be ruled out if the aforementioned trading range breaks on the lower side though the chances are quite remote in the short-term. The RSI on a weekly chart is bouncing back from significant support levels and prices are trading near 50-day moving average.



Considering the bird's eye view, the range of 72.30-72.15 per US Dollar is likely to act as a base in the medium-term and the ongoing lower top and lower bottom cycle might get reversed from these levels. The rising trend line support is likely to provide a cushion to the prices on every dip and traders can expect the sideways move to continue in the coming days.

FIIs data and economic triggers

The foreign institutional investors have been the net buyer of around Rs 1,185 crore in the week gone by. The data is likely to have a neutral to a mildly positive impact on Indian Rupee.

US jobless claim data which measures the number of people applied for the unemployment claim benefits for the first time, has come marginally higher than expected (released on October 15, 2020). The actual figure came in at 8,98,000 against the expected figure of 8,25,000 which is the highest in almost six weeks. The data is likely to have a mildly negative impact on the US Dollar. Apart from this, the uncertainty regarding the US stimulus package might keep the USD in subdued mode.

Dollar index

The index is likely to trade in the range of 94 to 92.90 in the coming days. The range shift of RSI in the weekly time frame from bearish to sideways zone suggests that the ongoing fall is likely to get abated and the index might enter into the phase of consolidation. The convergence of short term and medium term moving averages in the daily time frame suggests that sideways move is likely to continue.

Trading strategy

Considering that overall scenario it's quite apparent that the currency pair is likely to remain sideways in the forthcoming trading week and the theta depreciating-based strategy can be adopted to trade the setup. The traders can opt for a "Short Iron Butterfly" where at the money (ATM) Call and Put option can be sold to gain the premium and out of the money (OTM) Call and Put option can be bought to hedge the positions.

Sell USD/INR 73.25 CE @ 0.2725
Sell USD/INR 73.25 PE @ 0.0975
Buy USD/INR 73.75 CE @ 0.0725
Buy USD/INR 72.75 PE @ 0.0150
Maximum gain - 0.2825 points

Maximum risk - 0.2175 points

Note - Option premium mentioned resembles the last traded prices as on October 16, 2020 for the October 23 contract.

(Manish Srivastava, Senior Technical Analyst (Equity & Eurrency) at Rudra Shares & Stock Brokers Ltd. (SEBI Reg.No.INH100002524) (RA).)

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First Published on Oct 17, 2020 09:10 am