Rupee reversing from key hurdle

Buffeted by weak macroeconomic data and a political crisis, the rupee ended the week down 0.3 per cent against dollar to close at 54.37.

The WPI-based inflation for February clocked 6.84 per cent against the expected 6.54 per cent. Meanwhile, inflation at the consumer level continued to be in double-digits. Moderation in core inflation to 3.8 per cent from 4.1 per cent in the previous month was a positive.

HSBC and Morgan Stanley cut their forecast for India’s GDP growth for 2013-14 from 6.2 per cent to 6 per cent. On Tuesday, the RBI cut the repo rate by 25 basis points, meeting most market expectations. But any feel-good from this move dissipated quickly with the political imbroglio caused by coalition partner DMK withdrawing from the Government.

One-month implied volatility of the rupee, a measure of expected moves in exchange rates that is used to price options, increased by 9.5 basis points to 9.115 for the week. Three-month onshore rupee forwards were at 55.46 a dollar and offshore non-deliverable contracts were at 55.41 a dollar on Tuesday against 55.26 and 55.18, respectively, last week.

In the global market, the Euro-USD cross fell to an intra-week low of 1.2882 after the Euro area finance ministers agreed to tax Cypriot bank deposits as part of a €10 billion rescue plan for the country.

According to the plan, Cyprus will impose a 6.75 per cent levy on deposits of less than €100,000 and 9.9 per cent above that. The currency recouped to 1.2953 on Tuesday after speculation that the proposal would be postponed.

Economic data points coming out of the US indicate that the US economy may be gaining momentum. Retail, labour, industrial production and consumer prices all were better than previous periods. The Dollar index gained to 82.675 compared with 82.584 a week ago.

Technical analysis

The movement of the dollar index over the past two months has been significant. It reversed higher from the low of 78.9 on February 1, to gain almost 5 per cent. Increasing risk aversion caused by the debacle in Italian Parliamentary elections and the recent troubles in Cyprus were the triggers for this rally.

This up-move has taken the dollar index to its key long-term resistance zone between 82 and 84. It is highly likely that the dollar index reverses lower to move towards 72 again. But target on a firm move above 84 is 89.

Dollar-rupee outlook : The dollar-rupee pair has been whipsawing between 53.9 and 54.5 over the past week. The short-term trend in the currency pair is up but there are strong resistances at 54 and 53.7.

Inability to move above 53.7 will mean that the currency pair can weaken to 55.1 or 56.1 over the coming weeks.

USD-INR futures : This contract reversed from support at 54 on Tuesday. Traders can hold their long positions with stop loss at 53.9. Short-term targets are 54.6 and 55.

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