Yash Bundhoo
2 April 2008
analysis
Port Louis — One question that is tormenting every player in the Mauritian foreign exchange market today is what will be the fate of our local currency in the coming days?
It is now almost one year since the Mauritian Rupee (MUR) has been encroaching on the US dollar, at a particularly accelerated pace during the past quarter or so.
While a stronger rupee is expected to make our imports cheaper (at least theoretically), it is on the other side eroding our competitiveness by translating into a higher price for our exports. For how long will this situation persist, and more importantly, how far will the MUR gain at the expense of the dollar?
Many reasons are being put forward to account for this unexpected move of USDMUR mainly in terms of increased inflows of foreign currency through more direct investment (tourism sector), investment in our stock exchange and grants to sustain reform in the sugar sector and above all the general downtrend of USD against major currencies.
This is till now, but what lies in the future? One way to build up a forecast of USDMUR will be to assess the impact of these fundamentals on the economy. Theoretically, this sounds good but in practice this requires very intricate analyses, to the extent that most often we can only assess the impact of the fundamentals with a lag.The answer may perhaps lie in the charts - or technical analysis as some would call it.
General downward trend
Basically, it's all about using and interpreting past price movements to predict future prices. The positive thing about using charts is that all components influencing price is factored in- even the psychological mass behavior.
Driving home the aforesaid, if we consider the USDMUR weekly chart (refer to above chart), we find that after soaring to above 34 levels in early 2007, the dollar has assumed a general downward trend since then. Whatever time horizon we consider - daily, weekly or monthly - USDMUR still appears to be on downtrend.
Whereas there have been dips and surges which characterize a typically healthy trend, we note an accentuated appreciation of the MUR as from start of this year. We can clearly infer from the graph that since early 2007, the MUR has broken 2 major supports - first in October 2007 at 31.00 and the second one at 29.00 at the start of this year. This second support at 29.00 was a very important level as it corresponded to the long term upward trendline starting from early 1995.
The next important support lies at around 25.00 levels which is the earlier low seen in February 2004. Since, there seems to be no indication of any reversal of the downward trend at present, the scene looks all set for the dollar to test this support around 25.00. As a matter of fact, our secondary indicators only reinforce this view. The momentum and RSI (Relative Strength Index) are well below the midline and both are pointing downwards.
If the above arguments are topped up with some other factors such as:
a. Mauritius, which had been witnessing Balance of Payments Deficits for some preceding years, started to have Balance of Payment Surplus last year and is forecasted to have same this year:
b. Central Bank of Mauritius clearly stated that the market is free and they do not have the means to dictate the rate and also, it is not their intention at all to influence the exchange rate against the Rupee and ;
c. The intervention of the Central Bank is getting costly coupled with the fact the exchange rate at which they have been buying US Dollar has systematically fallen from Rs 28.50 in January 2008 to Rs 26.44 in March2008.
These are clear indications the 25.00 figure should be a very robust support, and it won't be exaggerated to expect the USD to test this level, if not breach it, before making its way up. In the current 21st century MUR has never traded below 25.00 levels, the last time MUR was below 25.00 dates back to early 1999.
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