Daily Rupee call: Initiate longs with stop loss at 71.1

The rupee (INR), on Friday, closed at 70.81 versus its previous close of 70.83 against the dollar (USD). Though we cannot see much change on a closing price basis, the rupee witnessed considerable intraday volatility. It opened much higher at 70.52 against the previous close of 70.83 but weakened throughout the day closing at 70.81. Similar price movement was also observed on Thursday. This indicates some selling pressure on the local currency of late, which may be due to profit booking as the rupee has been gaining for past the several days. It could also be due to central bank intervention.

As we can see, the domestic currency seems to have formed a range between 70.5 and 70.9 and unless it moves out of it, the next leg of trend cannot be confirmed. Above 70.5, it has resistance at 70.35 whereas, below 70.9, the next level of 71 is very critical. Below that level, the support is at 71.2.

Foreign reserves:

The weekly statistical supplement released by the RBI on Friday showed that the total foreign reserves have gone up by $2.3 billion over the previous week. The total reserves increased to a lifetime high of $453.42 billion from $451.08 billion. Foreign Currency Assets (FCA), the most significant component of the reserves went up by $1.9 billion to $421.25 billion from $419.37 in the same period. The value of gold holdings too increased by $0.4 billion to $27.07 billion from $26.65 billion. High foreign reserves could come in handy for the RBI to stem abnormal volatility in the rupee.

Trade deficit:

Also, on Friday, trade balance data was released by the Ministry of Commerce. According to the release, the trade deficit for the month of November 2019 is estimated to be $12.12 billion against the deficit of $17.58 billion in the corresponding month of the previous year. However, on a sequential basis there was a marginal uptick in deficit as in the month of October 2019 it was $11.01 billion. The year-on-year narrowing in the deficit is due to decelerating imports. In November 2019, exports dropped by 0.34 per cent whereas imports fell by 12.7 per cent.

If trade deficit continues to narrow, the domestic currency will benefit, whereas an increase will act as a dampener.

Dollar index:

The dollar, which saw buying on Friday, looks to be under pressure since today morning. The dollar index is currently trading at 96.67 after ending the past week at 97.17. Hence, the drag on the index might result in further decline where it might slip towards the support band between 96.35 and 96.5. On the upside, 97 still acts as a substantial hurdle.

Trade strategy:

Today, the rupee has opened higher at 70.75 against the previous close of 70.81. One can remain bullish on the domestic currency until it stays above 71, as it is a strong base. However, one needs to be wary of the downward pressure of late. By considering these factors, traders can be cautiously bullish and initiate long positions in the rupee on dips with stop loss at 71.1.

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