The rupee fell sharply against the greenback on Monday as heightened risk-aversion ahead of the US Presidential election sent the dollar higher. Expectation that gold imports could rise during the festival season and demand for dollars from importers also contributed to the downward pressure on the rupee. With China also set to start the process to change its leadership this week, forex markets are likely to remain in overdrive in the near-term.
Strong employment numbers for October in the US helped the dollar rally last weekend. The dollar index that tracks the movement of the dollar against a basket of currencies, moved to 80.7. Next resistance for the currency would be at 81.35. But inability to record a strong move above this level will result in the index retreating to 79 or 78 in the months ahead.
The rupee hit a low of 54.77 against the dollar on Tuesday. If we consider the retracement of the rally from the 57.3 low recorded on June 22, the critical 61.8 per cent retracement will be the next support for the rupee. This occurs at 55.
The rupee could reverse higher from this level heading towards 53.6 or 52.8 again. But sharp move above 52.8 is needed to signal that the near-term outlook has reversed higher. Inability to do so can keep the rupee in the band between 52.8 and 55 for few more weeks.
On the other hand, if the rupee manages to decline below 55, it will re-open the possibility of a decline towards its all-time low again.
If we consider the long-term trend in the rupee, it is in a structural downtrend since the January 2008 high of 39.2. The third leg of this move began in August 2011 from the peak at 44. The first target for this move was 56.9.
Since the rupee is reversing after hitting the low at 57.3, it is possible that the move from 2008 peak is now complete and a corrective move is now unfolding.
If we consider the targets of a long-term corrective wave, we get the targets of 51.2 and 50.4. It is now possible that the rupee moves in a sideways band between 50.4 and 57.2 for few months. But such a move will continue to have bearish connotation for the long-term outlook.
This contract is in an uptrend since the October low at 51.7. Key support to watch out for is at 53.7. Traders can hold their long positions as long as this level holds. Subsequent supports are at 53.4 and 53.
Immediate resistance for the contract is at 55.2. Strong break above this level can take the contract to 56.