Financial markets underwent a very turbulent period over the last fortnight. Statement by Federal Reserve chairman, Ben Bernanke, that he would consider reducing the ongoing stimulus programme if the US economy showed signs of picking up sent a wave of panic through financial markets since it is obvious to all the asset prices are currently inflated by such funds.

Yield on 10-year Japanese government bonds spiked close to 1 per cent last Thursday, sending the Nikkei crashing 7 per cent. Risk aversion spiked sending money out of most asset classes, into the safe haven of the dollar. The rupee too declined to the critical 56 level against the dollar on that day; dragging the Indian currency almost 5 per cent lower since the beginning of May.

This fall comes even as foreign institutional investors have net purchased close to $5 billion in May; $3.3 billion in equity and $1.7 billion in debt. Government continues to be worried about the impact of excessive gold imports on the current account deficit and the rupee and has banned loans against gold exchange traded funds and gold mutual funds. The GDP data for the March 2013 quarter is the next important data point that the forex market is keenly awaiting.

The dollar index that tracks the dollar’s move against a basket of currencies hit a high of 84.49 last Thursday when risk-aversion was at its highest. This index faces strong resistance between 84 and 85 and this band needs to be overcome to signal the possibility of a move higher to 89.

Dollar-rupee outlook

Rupee recorded a sharp decline to move near its key medium-term support at 56. The trough recorded last November at this level provides support to the stock. It also occurs at 76 per cent retracement of the up-move from the 57.32 trough.

If we extrapolate the down-move from the peak at 51.38, a 1:1 relation gives us the target at 57.4. Since this level also coincides with the trough formed last June, this is the next medium-term target for the rupee, if the 56 level is breached.

Short-term resistances will be at 54.5 and 53.6. Close above the second resistance is needed to make the short-term view positive.

USD-INR futures : This contract moved beyond our short-term target to record the high of 56 last Thursday. The short-term trend in the contract continues to be up and traders can hold their long positions with stop at 55.4.

Targets on breach of this level are 55.2 and 54.6.

If the contract breaks higher, it can move on to 56.2, 56.5 and 57.4 over the coming weeks.

EUR-INR futures : The euro-rupee contract is also moving higher. Traders can hold the contract with stop loss at 71.6. Subsequent supports are placed at 71.4 and 71.2.

Target on further move higher are 72.9 and 73.5.

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