The rupee, which has remained insulated from external events so far, has failed to escape the onslaught of the US elections.
The currency, which remained steady and range-bound between 66.3 and 67.2 for more than three months since August, plummeted, breaking this range last week.
This is thanks to the surprise victory of Donald Trump in the US Presidential election last week. The rupee has tumbled breaking below the psychological 67 mark and closed at 67.95 on Wednesday, down 2.2 per cent in the past week.
The US dollar index slumped to a low of 95.89 from around 98 on election day. However, it reversed higher after the victory of Trump was confirmed. The index has skyrocketed from this low to test the psychological 100 mark for the first time since December 2015. A crucial resistance is at 100.7, which is likely to be tested in the coming days. Whether or not the index manages to break above this hurdle will decide the next leg of the move.
A strong break above it may boost the momentum for a further rise to 101.48 — a key 61.8 per cent Fibonaccci retracement resistance. Inability to break above 100.7 may drag the index lower to 99. A range-bound move between 99 and 100.7 is possible for some time in such a scenario.
The level of 99 is an important support for the dollar index. Only a strong break below this support will make the outlook negative for the index.
EM currencies fallThe strong rally in the dollar index since the US elections has badly hit emerging market currencies. The Mexican Peso is the worst hit and is down 10 per cent against the dollar.
South African Rand and Brazilian Real are down 8 per cent and 7 per cent, respectively, while Chinese Yuan is down 1.2 per cent.
Major currencies, Japanese Yen, Swiss Franc and Euro, are down 2-4 per cent. The British Pound, up 0.4 per cent, is the only major currency which has strengthened against the greenback since election day.
Two consecutive days of gap-down open on Friday and Monday have played spoilsport for the rupee and turned the charts in favour of the dollar. Immediate support is at 68.
If the rupee manages to sustain above this support, an intermediate rise to 67.5 is possible. In that case, the rupee can trade range-bound between 67.5 and 68 for some time. The level of 67.5 is a very important resistance and further strength in the rupee is possible only if the currency manages to surpass this hurdle.
But given the current volatility, there is a strong likelihood of the rupee falling below 68 in the coming days. It can then weaken to 68.2 and 68.3 initially. Such a break will also increase the possibility of it falling to 68.8 levels once again. It will then bring the broader bearish outlook back into play. In such a scenario, the possibility of the rupee falling to fresh lows cannot be ruled out.