Flying again to fall...

Dollar has yet again done it. Our DD (Delicate darling) is again up on the cues of Germany banning naked short selling and Spain following its suite on certain securities and government bonds and further weakening of Euro. This has sparked a row amongst the global markets again on sentiments and trust factor. Naked short selling refers to selling of securities without borrowing in anticipation of buying them at cheaper rate in future. So its like I sell in future, 10 shares of Company A @ Rs. 10 while the current prevailing market price is Rs. 12, thereby betting on the future fall in price. It’s an agreement to sell company A stock @ Rs. 10 at a future specified date, no matter what the prevailing market price be at that particular point in time. Therefore, if the prevailing market price at a future specified date is below Rs. 10, I make a profit, and if its above Rs. 10 I intake a loss (however, this is done without borrowing the shares so in effect it’s a useful market manipulative tool to drag down the prices)

In effect, the partially convertible rupee was at 45.97/98 per dollar after hitting 46.01, its weakest since March 2 and below Tuesday's close of 45.60/61. This was majorly due to short covering of positions on Dollar by India traders. This event though short term, will give some respite to the exporters, who were sobbing away at the rate at which rupee was appreciating. The Major indices in the Asia Pacific region were all in the Red.
Some think this as a resurrection of Dollar, some think of this as weakening of global indices based on EU. Euro has lost its sheen and is trading at its all time low of four years (though comparing today’s time with the economic situation 4 years ago will be a little unfair). Yuan is on the other hand set to be revalued. There are different policies being reviewed by China to cool down their economy, wherein not only the inflation is high, but the amount of US dollars being bought from the market to keep Yuan artificially low is hurting other economies as well. Also by keeping price artificially down for the exports, China is inadvertently keeping the Inflation for countries like US and UK artificially lower. This is just like a volcano preparing to erupt again.

The Chinese markets corrected by almost 5% in the past few days. On one hand the dollar is again the favorite of investors as Gold is becoming overvalued (again a limited resource, short in supply) and Euro is rock bottom. However, once China revalues its currency, it will be forced to sell Dollar in the market thus forcing Dollar to correct in value. Once this starts, the Inflation will begin to rise slowly in US and the UK, thereby adding to their financial woes. Its speculated that Greece and other countries of PIIGS will become competitive. However, am wondering what they produce that they will become competitive. I’m not sure if any major companies in the world would like to set up their plants in countries where some asset markets have crashed by more than 80%.

With Dollar being available in the market and losing its value, investors might want to offload the currency and sit on cash. Rupee in the mean time is likely to gain and become competitive; though this is expected in 3-4 weeks to come.
While the dollar value is expected to go down in the coming few days so is the value of Crude (which is currently trading at $69 -$70). As US has stocked its Oil warehouses, which is the primary reason for the fall in Crude prices accompanied by slow demand from the EU. In addition we can expect with the Rise in Yuan, the demand for Oil which is the major contributing factor for inflation worldwide to slow down (As China is one of the biggest consumer of Oil). As China revalues the currency thereby leading to rise in inflation in its country as well, economic measures might slow down the demand for some time before catching up again with rise in its internal consumption.

Rupee will fall as dollar is withdrawn from the market, however, it will start rising as soon as Dollar is sold in the market and will command a premium over other currencies for some time i.e. till the economies are cooled down. Inflation will be controlled in India as crude is expected to fall and be range bound around $69 - $75 (according to IOC estimates). The markets are expected to correct in near future, however, it will mostly be due to FII’s pulling out in the short term. I expect the dollar inflows to start soon after Yuan is revalued, as investors will run for safer havens. Hence, the rise of Dollar as of now should not be viewed as strengthening of that currency and at the same time the fall of Rupee should not be viewed as a negative sign.
The growth is intact and the economic policies rock solid.
However, one thing still is unanswered, what will EU do with $1.4 trillion, where will it invest? Answers anyone….