The Hindu Business Line : Short-term strength in rupee

It was absolute pandemonium in foreign exchange markets last week. Extreme risk-aversion caused unwinding of the yen carry trade, making the yen strengthen to 97.9 against the dollar, the dollar strengthened as money flowed into US equities and money markets, the pound declined to level last seen in November 2003 against the dollar and the rupee breached 49- trough.

Normalcy was, however, restored on Monday as investors finally took cognizance of the efforts being made to impart liquidity. Euro and pound strengthened after the British Government said it would pump in $63 billion into three banks and the US Federal Reserve promised unlimited supply of dollars to other central banks. Dollar index on ICE moved higher to 83.5, in line with our expectation. Next impediment for this index is at 84.4. Sharp upward reversal in equity markets has eased the pressure off the Indian currency in the short-term.

One-month view

The rupee achieved our medium-term target of 49 last Friday and rebounded after recording a trough at 49.3. As explained earlier, the 49-level is a key long-term support and a reversal from this level can cause the rupee to appreciate towards 43 or even 39 over the next year.

Since this is a long-term trough, we need to put in some filter to provision for false-breakouts. A monthly close below 50 would be required to signal that the currency has resumed the structural downtrend that is in sway over the last three decades.

The most likely movement over the medium-term is a sideways movement between 45 and 49 as the rupee consolidates sideways. Appreciation beyond 45 is needed to mitigate the negative medium-term view for the currency.

Five-day view

A short-term trough appears to have been formed at 49.3. Immediate resistance band for the rupee lies between 46.8 and 47. If this level is surpassed, the Indian currency can appreciate further towards 45.2.

Conversely, a downward reversal from 47.5 would take the rupee lower towards 48.6 or 49.2 once again.

Supports – 48.6, 49.2, 49.9

Resistances – 46.8, 46.1, 45.2

Lokeshwarri S. K.

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