While the euro, dollar and yen crosses are highly liquid and popularly traded, there are certain currency crosses which are somewhat more “obscure” in the sense that they involve lesser-traded currencies. These obscure currency pairs may or may not contain any major currency, but they have less liquidity and more volatile behaviour as a result of their lower trading volumes.
Most forex traders avoid trading obscure crosses because these pairs are more difficult and riskier to trade than more popular pairs like Cable or Gopher. However, sometimes, an obscure currency pair becomes a promising trading candidate for smart traders because of the fundamental changes happening in the economies of either of the involved currencies.
One such currency pair presenting impressive trading opportunity is USD/INR (US Dollar/Indian Rupee).
History of USD/INR currency pair
Between Feb, 2012 and Aug, 2013 this currency pair offered great trading opportunity to forex traders as US Dollar appreciated by more than 35% against Indian Rupee. However, since then USD/INR has been behaving like any other lesser known currency pair, which means it has been volatile, range bound, and trading with low volumes. For the past year this pair has been trading in a range of nearly 7% with low volumes.
One of the main reasons for its range bound behaviour has been the economic stagnancy in the Indian economy in particular, and the wait for Indian elections.
Political developments in India
Since 2004, India was ruled by a coalition government under Dr. Manmohan Singh. Business and the economy of India was considerably hit by the 2008 recession, but it later went into stagnancy due to what experts call a “policy paralysis” of the then government.
However, in May, 2014 election results brought in a new government led by Mr. Narendra Modi. He won by promising to deliver economic growth and also has a track record of rapid economic development.
This political change has caught the eyes of all the major investors from all over the world, which will give a major boost to India’s economy and eventually its currency.
Economies showing recovery
While the US economy still faces many challenges, it is clear that the US has largely recovered from the economic depression it was hit by in 2008. Therefore, US economy is strengthening with every passing day. Between Dec, 2013 and Aug, 2014, the US has topped the list of highest contributors to the rise in global equity market capitalization. The US has been accountable for a mammoth 41% of the rise in global equity market cap.
However, the most surprising fact is that India stands at second in this list ahead of China. Although, the contribution of India to the rise in global equity market cap is only 10%, its own equity market cap has increased by 36%, which is fully five times the 7% increase seen in the US equity market cap. Increasing acceptance of online stockbroking is considered a major contributor for increased investment in equity sector.
Therefore, if investing in equities is any sign of increasing investor confidence in the future economic prospects of a country, then the investors’ confidence in India is considerably higher than many might predict.
Final thoughts
The recovering US economy and many fundamental changes happening in India’s economy and political scenario point towards the fact that USD/INR will soon catch the fancy of many smart forex traders. Which way USD/INR currency pair will move requires a more in-depth analysis, but one fact is clear, that it will enter a new trend soon and its trading volume will increase, which will surely pull this currency pair out of obscurity and into the limelight.
Prepared by IG Singapore
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