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The turbulence in the currency market as the Chinese central bank linked the yuan reference rate to the market saw the rupee hit a low of 65 against the dollar last week.
While the sharp decline in the Wholesale Price Index (WPI) inflation to minus 4.05 per cent provided some respite to the currency on Friday, the positive impact proved to be short-lived as the weak trade deficit data exerted pressure on the rupee once again.
India’s exports fell 10.3 per cent (year-on-year) in July, its eighth consecutive monthly fall. The trade deficit widened to $12.81 billion in July from a deficit of $10.83 billion a month earlier.
The rupee fell to a record a low of 65.41 on Wednesday but recovered slightly to close at 65.27, down 0.7 per cent for the week.
The sharp fall below 65 has brought an end to the prolonged sideways consolidation range of 63.3-64.3 inside which the rupee was trading for more than three months.
Dollar-rupee outlook The pressure is mounting as this could be the beginning of a fresh leg of down move for the currency. The dollar index (96.9) has been broadly range bound between 96 and 98 over the last one month.
Within this range, the index is bouncing back after finding support near 96. There is a strong possibility of the index rising to 98 — the upper end of the range — in the coming days.
US data on existing home sales, consumer confidence and new home sales are the key releases to watch for this week.
The outlook for the rupee is bearish.
Despite the recovery from the low of 65.41, there are a series of key resistances which could restrict the upside for the currency in the short term.
The immediate hurdle is at 65. Inability to breach this hurdle can take the rupee lower to 65.5 in the coming week. It will then pave the way for a fall to 66 and even 67 in the short term.
On the other hand, the rupee can move higher this week if it manages to surpass the psychological hurdle at 65.
It can then move to 64.5 or even 64.3. The 64.5-64.3 zone is a strong resistance and the rupee is unlikely to strengthen beyond this level in the short term.
Trend reversal The strong break and a decisive close below 64.3 confirm a head-and-shoulder reversal pattern on the chart.
The neckline resistance of this pattern is at 64.3. The medium-term outlook will remain bearish as long as the rupee trades below this level.
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