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The Economic Times

View: Rupee is following in the footsteps of yuan

By Bhavik Patel

Market is full of news that Chinese Renminbi is depreciating, but there is almost no news on how the country has expanded its money supply. In 2016, Chinese central bank lost $1 trillion in propping up the currency, as they thought yuan was depreciating faster than required.

Indian rupee meanwhile is more correlated with Chinese yuan than the dollar right now. The chart below shows correlation between the Indian unit and the dollar Index.

Even though dollar Index is appreciating, the rupee has gained during the recent sessions.


China recently announced a 50 basis point cut in reserve requirements so banks would be able to lend more. However, Chinese bank has been on a credit binge since 2009 and have created $21 trillion of new money, which is twice than the US, euro zone and Japan combined during that period.

This enormous money creation by chinese banks out of thin air will exacerbate China’s credit bubble. The rapidly expanding money supply will produce growing devaluation pressure on renminbi. Since early 2018, renminbi has depreciated by 12 per cent, and in August, it depreciated by around 4 per cent, biggest monthly decline in a decade.

Depreciating renminbi has reverberated pain across Asian and other emerging markets such as India. The MSCI Asia and MSCI EM Equity indices have fallen more than 24 per cent in dollar terms from their peaks in January 2018. This depreciating renminbi is pulling our currency down as we need to remain competitive from export oriented point of view.


The above chart shows an hourly price action of USD/CNY and USD/INR. As we can see it is mirror image where if Chinese renminbi appreciates, our currency appreciates regardless of our equity inflow or market and vice versa.

The rupee after being in overbought condition has once again appreciated. There was negative divergence in RSI 14 and the unit was expected to appreciate. We expect rupee to test levels till 71.15-71.30 which comes to 61.8% retracement and maximum correction till 70.72 which is 50 per cent retracement.

On the upside, target of 73.50 continues to hold which is 123.6 per cent retracement, as we don’t see Chinese Yuan appreciating too much unless real trade talks happen between US and China.


(Bhavik Patel is Senior Technical Analyst of Commodities at Tradebulls Securities. Investors are advised to consult financial advisers before taking an investment calls based on these observations)
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