time to remember history once again

We wish all our networked community a happy and prosperous new year

Our absence of uploading a post was noticeable to quite a few of our
networked people. The markets really go crazy in last month / few weeks of the
calendar year and its hazardous to take a view or embark upon any serious thought
about next year and the only happy people are the day traders who with some stop
losses can get good results. We were one of the community.

One question trickled in which asked us to explain the movement between metals and USD.
We have been observing it especially with gold and there have been occassions in the recent past
wherein a few industrial metals also go down with dollar strength (though at present they are
doing strong). -- One reason could be earlier risk aversion of dollar lead to a build-up of positions
in the yellow metal. As hedge funds re-worked their thinking about global demand supply, a few of
the other commodities too found their way on to the truck along with Gold. Thus all of them appreciated
as dollar fell and the other way round.

The year has begun. many of our networked friends are still complacent about interest rates especially the USD. Before giving out any predictions and fundamental logics , we would rather draw on our past. The past wherein we have seen how the animal called inflation woke up and within no time changed the whole perception of the world.

It was 2004 and the month was March. The best of forecasts called for a rate hike of 25bp a return of liquidity tightening from 0.99% libor only in March 2005-- not before. The best of traders had sold FRAs and aligned accordingly. Two inflation datas and two good employment reports i.e just two months of April and May changed the story. August 2004 Greenspan hiked 25 bp and kept on hiking rates for another seven consequent times taking the 6m libor to 5.5% ( 2007 sept). One remembers the events so clearly especially if you have been stuck against the market. We still remember waking up mid night to see the 10 yr US treasury ticker .....which came once in some 5 minutes -- a penalty for ignoring inflation.

In currency markets it was another landmark episode. 2005 one investment bank predicted Rupee at 45 in 12 months when it was at 40 and whole community was calling for 37-38. It was a call from economist`s desk and a concern about fiscal deficit and overvaluation of rupee was raised. not so much of the latter as for earlier. Fiscal deficit--- we still live in it and we had lived with it even before the forecast. What changed so suddenly --- focus -- it shifted from all other things to fiscal deficit. No other element seemed as important to otherwise cosy community of exporters who had merrily sold dollars forward even 2 to 3 years instead of one. And the importers listened in disbelief . The first 2 rupee movement was due to market trigger and the rest 3 Rs. was from position reversals and stop loss triggers.

Year 2010 . Hope people recollect those episodes before they happen -- And take corrective steps by implementing hedges. A myopic view about hedge is of a export side core hedge-- Rather, many people feel that core hedge only relates to a hedge whcih protects our Rupee realisation value from dollar exports. --This is true for entity with one sided exposure. More often due to change in economic parameters the ratio of domestic to export sales undergoes a change and the entity ends up twice imports as that of exports.In such a case just because rupee is expected to appreciate -core hedge cannot be on export side. Perhaps more risk lies on the import side.

Entities have borrowed at 5.5% 6m libor rate and kept riding the downwave on each subsequent revision.
till 0.42% .They have acted very well all this while. But we see a hesitation from entities to spell out how much savings they desire are enough and and what level they need to lock-in. There seems to be a belief that USD libor will not go up so fast so soon. -- for a moment we agree to this but also ask-- are 3% gains not enough to think of initiating a 20-30% hedge ?

This 2010 seems to be a very interesting year. Because all the stories are over. last two years the story of dollar depreciation prevailed. -- the movie was made just that way --with dollar index falling to all time lows.
So now the themes seem to be changing back to dollar strength -- is it because the dollar weakness story has lived its life and we ant some new spice ?? but then advocates of prolonged US weakness and Asia shining story give dollar weakness one more chance. -- The result is -- both dollar bulls and bears seem to have an agreement to share a single Tent. It is yet decided as to who would reside in at first half of the year and who during the next half. ---- We better stay protected objectively w.r.t our Benchmarks and margins per unit without getting emotional either about the dollar bulls or the dollar bears.