After being battered since the beginning of March, the rupee finally reversed direction last fortnight. Over the last two weeks, the INR gained 2.9 per cent against the US dollar to close at 54.37, and was up 3.1 per cent against the euro at 68.46.

The change of guard last week at the Finance Ministry which issued soothing statements and set the ball rolling seems to have done the trick. But this was not before the rupee plunged to an all-time low of 57.16 against the dollar.

The fall was triggered by market disappointment on the over-promise and under-delivery in measures to shore up the rupee.

The increase in foreign investment ceiling in government bonds from $15 billion to $20 billion did not impress, and the rupee which had gained on expectations of stronger measures dipped sharply.

But after the Prime Minister took charge of the Finance Ministry and asked officials to revive the ‘animal spirits’ in the economy, there was a pause in the rupee’s fall.

This, along with his statement for the need to address problems on the tax front, improved sentiments. The draft guidelines on the general anti-avoidance rules (GAAR) which were issued soon after said that the rules would not apply retrospectively, and that P-notes were outside the ambit. This came as a boost to the rupee.

But it remains to be seen whether the strength sustains. While the steep fall in the price of crude oil should help, continued difficulty on the macroeconomic front could throw a spanner in the works.

Uncertainty about the economic conditions continued in Europe, especially Spain and Italy, despite some positive signals in the EU summit. This contributed to the Euro losing 0.9 per cent against the dollar over the past fortnight to currently yield 1.257 USD per unit. The Dollar Index strengthened 0.7 per cent on the back of no immediate quantitative easing (QE) by the US Fed. It currently trades at 81.986.

Dollar rupee outlook

Following a sideways movement between 56.3 and 57.3, the currency gained 2.1 per cent breaking out of this range and also breaking through key resistance at 56 on Friday. Further, it breached a significant resistance at 55 by jumping 1.9 per cent on Tuesday. This rally has signalled that the near-term trend is reversing higher.

Since the June 22 low at 57.3, the currency has been in a near-term uptrend. However, the currency will face resistance ahead at 53.7. A strong close above this level will lift the currency higher to 53 and 52.8 in the short-term.

Medium-term trend in the currency is down. Only an emphatic rally above 52 will reverse this downtrend and take the currency higher to 51.2 and to 50 in the medium-term. Key medium-term supports are at 56 and 57.5. If the currency declines below the second support, reaching to 59.1 is possible.

USD-INR futures

This contract changed direction and fell sharply on Friday. Its near-term trend is down. The contract breached its 50-day moving average on Tuesday and is hovering will below the 21- and 50-day moving averages. Short-term traders can sell the contract with stop-loss at 55. Targets are 54, 53.7 and 53. Important resistance above 55 are at 55.7 and 56.2

(This article was published on July 3, 2012)
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