Thursday, March 19, 2009

US dollar per Euro,NIFTY and Gold short term outlook

US Dollar per 1 Euro vs NIFTY INDIA

"You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time."- Abraham Lincoln
I used that quote for central banks across the world and the potential impact on gold,inflation.

See the above pic( click to enlarge),
  • From 5th Dec 08 to 20th dec 08 – USD per 1 Euro fell by 14%( from 1.26 to 1.44), NIFTY went up by 15% from 2700 to 3100.
  • From 3rd Mar`09 to 20th Mar`09 – USD fell by 9%( from 1.26 to 1.36), NIFTY went up by 9% from 2575 to 2800.

So correlation of NIFTY vs USD -EURO is quite high. Of course, correlations can breakdown at times.
Now looking at the USD trend , it looks set to weaken further to reach its earlier Dec`08 low of 1.43, resistance level. I believe this resistance would be difficult to break mainly due to huge short term debt repayments ( in USD) by countries like east Europe ( $300 bn), Russia ( $ 200 bn), even Tata Motors has to repay $ 2 bn by Jun`09. Also overall supply of dollars in the system is still low to drop in world trade as seen in the Baltic dry Index (BDI) is still down 80% to 2,000 from high of 11,700. BDI though has recovered from low of 700 ( Jan`09) to 2300 but it is now still below 2000.
Thus in the short term, outlook is USD could weaken to 1.43 ( another 4% upside from cmp 1.36), Correspondingly commodities alongwith Gold( as they are based in USD) should rally, Asian countries currencies to strengthen moderately, leading asian stocks higher. But I do not see gold making new highs soon due to reasons mentioned above. Likelihood for gold making news highs would be towards the year end, when dollar resumes its fall. In all likelihood , USD should again trend lower after hitting 1.43 levels and markets should then again correct.
So for NIFTY India ,max another +5 to +10% rally left by Mar`09 end, keeping in mind index already +10% from lows. So at 2900-2950 levels, Calls of 3100 could be sold. But risk would be to Nifty can reach higher if USD weakens beyond 1.43.
Longer term – by Dec`09, as short term repayments are settled, dollar could fall at a faster rate, that could lead to higher inflation & markets could again fall as central banks would be limited in reducing rates further. A rapid fall in dollar ( say beyond 1.6) would impact Asian economies negatively as the value of huge forex will erode, their exports will get expensive, and inflation would creep up due to dollar denominated commodities. Gold could make news highs by year end and Gold correction could start to set in from mid- next year as fundamentals & demand destruction catches up.

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