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Rupee’s strong rally against the greenback that made it appreciate from 56 to 51.3 (8.3 per cent) in September reversed equally sharply catching many unawares. The currency has etched a V shaped reversal and has already lost 5 per cent since its recent peak at 51.3. Demand for dollars from importers and the government for defence related purchases, ebb in global risk appetite and mild correction in equity market were some of the reasons for this downward movement.
As the government ran out of further policy reforms to boost sentiment, foreign institutional investors have also been going slow with their equity investments, bringing down the portfolio inflows. Economic data has not been conducive with declining exports, industrial production growing at a weak 2.7 per cent in August and headline inflation at a 10-month high for September.
The dollar index is stuck in a narrow range between 78.6 and 80 even as the US equities are tumbling lower triggered by weak earnings for the September quarter. This index is halting at the 50 per cent fibonacci retracement level of its previous up-move. Next support for the index will be at 77.
Dollar rupee outlook
As we have reiterated in our previous columns, the dollar rupee pair has key medium-term resistance at 51.9. This occurs at 61.8 per cent retracement of the previous down-trend.
That the trough in March 2009 was formed at around 52 also makes it a very significant hurdle for the rupee. Failure to record a weekly close above this level implies that the long-term trend for the Indian currency stays down.
The Indian currency tested this level on October 5 before reversing lower. The support that we need to watch now is at 53.5. The currency is currently hovering around this level. If the rupee is unable to breach this level, it can strengthen towards 52 level again. The currency can then move between 52 and 54 for few months.
But sharp decline below 53.5 will mean that the rupee could decline to 54.3 or 55 in the medium-term.
USD-INR futures
The short-term trend in USD-INR futures is up since the trough formed at 51.5 on October 5. But the contract has neared key medium-term hurdle at 54. Traders holding long positions should hold their positions only as long as the contract trades above 53.
Breach of this level can drag the contract to 52.8 or 52.5.
If the rally continues in the short-term, subsequent targets are at 54.4 and 54.5.
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