Since currency is a pair trading - trading of currency of one country vs other (USD vs INR), there are two ways to look at a currency pair strength or weakness.
For example - in USDINR, when we say INR is strengthening, it can happen on account of two things - dollar weakness or INR own intrinsic strength.
When I say, INR intrinsic strength, it basically means strength on account of domestic factors, like economic (GDP) growth, positive real rates (inflation lower than policy rates) or improving trade balance (exports doing better import) etc.
To trade successfully, it is important to understand that what is driving the INR strength or weakness - global factor (dollar or global risk off) or local factors - economic growth, real rates etc.
The good indicators to gauge the factors are:
1) Dollar Index (DXY) - tells how dollar is performing against a basket of currencies.
2) Oil - Since higher oil means higher import, it impacts our trade balance negatively.
1) Dollar Index (DXY) - tells how dollar is performing against a basket of currencies.
2) Oil - Since higher oil means higher import, it impacts our trade balance negatively.
3) Capital Flows - Higher flows broadly reflects the foreign investors optimism to India's long term growth potential. At times, flows are also driven by yield chasing.
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