New Delhi: Riding high on the back of buying by FIIs, healthy monsoon and better than expected earnings season, Sensex has rallied over 2,800 points in just four days to scale 58,000. Analysts believe that if the US dollar index continues to slide against major currencies, the bounce back in Indian equities may last longer.
The Indian rupee, which had breached the all-time low level of 80 last month, is now gaining strength and touched a one-month high of 78.87 against the dollar on Tuesday amid decline in US treasury yields and disappointing economic data. According to analysts, the steady decline in the dollar index from above 109 to below 106 level has slowed down capital outflows from other markets to the US.
Historical analysis has suggested that when an uptrend in the dollar index is followed by a correction, it has always led to a rally in emerging markets.
Data suggested that the flight to the safety of the US dollar appears to be over for now.
“Dollar index monthly chart shows completion of harmonic pattern which is bearish in nature. The minimum target of 89 opens up till the time index trades below 110. Bearish observations on the dollar index support our bullish view on emerging equity for the next few months,” says
Broking’s research head Vinay Khattar.
Having hit a low of 15,183 in June, Nifty has recovered 13 per cent amid a host of positive global and domestic factors.
Madhavi Mehta, commodity research analyst, Kotak Securities said that the rally in the US dollar was led by market players moving out of riskier assets amid increasing debate about a recession and the Fed’s tightening. The sharp rise in the US dollar, however, made it vulnerable to profit-taking as market players positioned for the key Fed decision.
“The losses extended as the Fed failed to surprise while the Fed Chairman pointed towards an open-ended approach. As the US dollar showed some signs of exhaustion, commodities, equities and other traditional safe havens all matched up,” Mehta said.
This shift between the US dollar and other assets shows that the market sentiment is being driven by growth expectations and monetary policy debate, she added.
A recovery in the Indian rupee will be positive for imports in the near term while currency depreciation over the long run will be positive for export-driven businesses.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)