Over the last week, the rupee had its best rally against the US dollar since June reaching a high of 54.8 on Monday. The sentiment improved as the logjam in Parliament ended and the government agreed last Thursday to allow discussion and vote on FDI in retail.

The Finance Ministry increasing FII investment limits in government securities and corporate bonds by $5 billion each also helped in strengthening the Indian currency.

A buoyant stock market spurred by Moody’s retaining stable outlook on the nation’s credit rating and Goldman Sachs raising the rating on local shares to overweight was another positive. The rally in the rupee came to a halt on Tuesday as oil and gold importers reportedly took advantage of the strengthening currency to purchase dollars. But over the past week, the rupee has gained 1.4 per cent to close at 54.7. One month implied volatility, a measure of expected moves in exchange rates that is used to price options, rose 41 basis points to 9.9 for the week. This implies that traders expect the rupee swings to widen in the sessions ahead.

Three month onshore rupee forwards were trading at 55.6 per dollar and offshore non deliverable contracts were at 55.5 per dollar on Tuesday. Over the last week, the rupee also gained against the euro and pound by 0.3 and 0.7 per cent respectively to trade at 71.5 and 88.1. The dollar index, which tracks the greenback against currencies of six US trading partners, declined 0.84 per cent to 79.7. The dollar weakened as US manufacturing data showed an unexpected contraction.

Dollar rupee outlook

Rupee reversed from the low of 55.88 to rally sharply over the past week. This rally however halted at the short-term resistance at 54.1 and the currency is hovering slightly below this level. Failure to strengthen above 54.1 denotes that the short-term view stays negative. This hurdle needs to be surpassed if the rupee has to move on to the next higher targets at 53.6 or 53.1. Immediate support for the currency stays at 56. The currency could attempt to move in the range between 54 and 56 for few weeks before breaking lower. Medium term targets on break below 56 are 57 and 58.7. Medium-term view will turn positive only on strong close above 53.1.

USD-INR futures

USD INR futures moved contrary to our expectation, reversing lower to the low of 54.48. Traders can hold the contract with the stop loss just below this level. Next support is at 54.2. Resistances for the week ahead would be at 55.1 and 55.3.

(This article was published on December 4, 2012)
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