Charts Suggest Disaster Ahead For The Rupee

Let's start with the chart that sparked the need for this post.

Below we're looking at the US-based WisdomTree Dreyfus Emerging Currency ETF (CEW), which holds 14 Emerging Market Currencies ranging from the South African Rand to the Filipino Piso. This basket is essentially equally-weighted, so it does a good job of tracking the performance of the average EM Currency relative to the US Dollar.

Click on chart to enlarge view.

In late March we put out a trade idea for our US Subscribers outlining the potential for this ETF to mean revert to the upside. Prices were down near long-term support, downside momentum was waning, and the risk was very well-defined. Since we were betting that prices of the ETF would head higher, that means we were expecting the US Dollar to weaken.

Today, we're meeting our upside price objective at former support and would expect sellers to emerge. In other words, our expectation is now that the US Dollar will strengthen against many of these EM Currencies.

Given that expectation, we want to look into the individual currencies that comprise this ETF and identify which were weakest during the rally, so we know which are most likely to struggle during the selloff.

When we look at performance from the March 23rd low, we see that USD/INR is the 3rd best performer of the 14 currencies. What this means is that despite a strong rally in EM Currencies over the last 10 weeks, the Rupee did not participate at all. In other words, it was showing relative weakness versus the US Dollar. And so now if we're looking for the US Dollar to strengthen, then the Rupee and other EM currencies that did not rally over the last few months are likely to get crushed.

Here's the weekly chart of USD/INR which we've been using as our roadmap for years. As long as prices are above their former highs of 74.50, then this structural uptrend remains intact and further gains towards 80 can be expected. And if the US Dollar is going to gain traction relative to most EM Currencies, then we should see this trend reaccelerate to the upside soon.

Combine this weakness against the US Dollar with its weakness against the Euro, Pound, and Yen, and the case remains clear for a weaker Rupee across the board. And if these charts have anything to say about it, that weakness should accelerate in the coming month/quarter.

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Allstarcharts Team