'Negative bias visible in USD-INR pair, deploy Bear Call Spread strategy'

The US Dollar/Indian rupee (USD/INR) traded in a narrow range in the week gone by and closed almost flat on a week-on-week basis. The structure suggests that the current phase of consolidation is laying a foundation for the next leg of move.

Generally, the price breaks out in the direction of an original trend after a mild pause and in the current case, the overall trend is favouring the bears. The prices are trading below all major short-term and medium-term moving averages where short-term averages have developed a negative curve.

The confluence of overhead medium term moving averages ribbon suggests that any rise in price is likely to face supply pressure at higher levels. The small body candles in the last three trading sessions is reflecting the indecisiveness of buyers/ sellers and the currency pair has taken the support of rising trend line formed by joining the lows of October 9, 2020, and December 2, 2020.

The level of Rs 73.96 per USD is likely to act as a resistance in the short term while trend line support is emerging at Rs 73.46 per USD. The fall is likely to extend till the level of Rs72.90 per USD, if the mentioned support level breaks on the lower side.

FIIs data and fundamental triggers

Since the starting of December, the foreign institutional investors have been continuously delivering buying figures and the net inflow has exceeded above Rs 26, 920 crores. The continuous inflow of foreign currency is infusing positive sentiments in Indian Rupee (INR).

The initial jobless claim data released on December 10, 2020, is mildly negative for USD. Approximately 8.53 lakhs people have claimed for the unemployment benefit against the expected figure of 7.25 lakhs.

United States dollar against other currencies

Since the end of May 2020, the continuous fall can be seen in the USD against the Chinese Yuan (CNY). More than 9 percent of fall has been witnessed in USD against CNY. Similarly, the fall of approximately 11.5 percent and 6.08 percent has been witnessed against Euro and Japanese Yen respectively from the recent highs of May and June.

The dollar index is also trading at the lows of three years. The impact of weakness in USD has not been reflected in the USD/INR currency pair yet and a fall of around 4.7 percent only has been witnessed in USD in the last six months against INR.

Considering the India’s positive economic triggers and decent inflow of foreign currency, INR is likely to appreciate further in the coming days and negative bias can be expected in USD/INR in the short term.

Trading Strategy

Considering the overall structure, the negative bias in the currency pair is quite apparent and selling pressure at higher levels might not be ruled out. To trade the setup, traders can adopt theta depreciating based “Bear Call Spread” where out of the money (OTM) call option can be sold to gain the premium amount and a deep OTM call option can be bought to hedge the positions.

Sell USD/INR 74 CE @ 0.0925

Buy USD/INR 74.25 CE @ 0.040

Expected gain - up to 0.0525 points

Break-Even Point - 74.0525

Strategy can handle the volatility and can also absorb limited upside. The maximum gain can be obtained if the currency pair expires below 74.

Note - Option premium mentioned resembles the last traded price as on December 11, 2020, for December 18, contract.

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