Conflicting pulls resulted in the rupee turning volatile over the week. But it ended almost flat at 54.09 against the US dollar compared to 54.06 last week.

On the one hand, safe haven demand for the dollar saw the rupee weakening to 54.63 on Thursday, and on the other hand, expectations of a positive Budget for the currency saw it strengthen to 53.86 on Monday.

The Government cut its market borrowing by Rs 12,000 crore in its bid to rein in the fiscal deficit this year at 5.3 per cent of GDP.

A hung parliament in Italy led to the weakness in the Euro. The Euro-USD cross fell to a low of 1.3018 on Tuesday. The common currency is down 2.4 per cent against the USD over the week.

Meanwhile, the dollar index strengthened around 1.7 per cent over the week to 81.726 compared to 80.468 last week.

The rally in the dollar was on the back of investors shifting towards the safety of the greenback following signs of weakening global growth.

The Chinese manufacturing purchasing managers index (PMI) fell to 50.4 in February compared to 52.3 in January. Also, indications that the Federal Open Market Committee may prefer an early retrial of the asset purchase programme (quantitative easing) also spooked investor sentiment and resulted in a sell-off in risky assets.

One-month implied volatility for the rupee, a measure of expected movement in exchange rates that is used to price options, increased by 31 basis points to 9.4 for the week. Three-month onshore rupee forwards were at 55.19 a dollar and offshore non-deliverable contracts were at 55.07 a dollar on Tuesday compared to 55.17 and 55.26, respectively, last week.

Technical outlook

Dollar-rupe e: The rupee was very volatile against the dollar over the past week, whipsawing in the range between 53.8 and 54.6.

As we have been reiterating, the long-term trend in the Indian currency continues to be down. The currency will have to record a strong close above 53 to signal a reversal in this view. Key short-term support is at 54.7. The downtrend will accelerate if the currency moves below this level. Next downward targets are 55.4 and 55.9.

In the short-term, the rupee can vacillate between 53.9 and 54.6. Short-term trend will stay negative as long as the currency trades below 53.5.

USD-INR futures : This contract touched a peak of 54.7 before declining to 53.9 on Tuesday. Short-term traders can hold their long positions with stop loss at 53.8.

The contract can go on to 54.2, 54.4 and 54.7 in the week ahead. Short-term view will reverse only on close below 53.8. Subsequent support is 53.7.

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