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The Indian rupee fell further as expected towards 67 last week. The currency fell to a low of 66.94 on Thursday. However, it managed to recover some of the losses from this low and closed at 66.66 on Friday, down 0.27 per cent for the week. The Indian currency markets are closed for the first two days of this week – Monday and Tuesday – as these are public holidays.
The drag factors
Two major factors dragged the rupee lower last week. First was the strong rise in US Treasury yields. The US 10-yr Treasury yields surged to 3.03 per cent on Wednesday and fell back slightly from those levels to close the week at 2.96 per cent on Friday. The strong yields pushed the US dollar index higher, which in turn dragged the rupee lower.
The second factor was foreign portfolio investors (FPIs) continuing to sell Indian debt. FPIs remained net sellers of Indian debt for the second consecutive week. They sold $971 million last weekend and $2.1 billion in the last fortnight. The Indian rupee will remain under pressure if the FPI sell-off continues.
Volatile week
Volatility is guaranteed for the rupee as the truncated week is packed with key events and data releases. First, the currency is likely to open on Wednesday with a wide gap after being closed for an extended weekend. Second, the US Federal Reserve meeting is due on Wednesday. Though a rate hike is not expected this time, any change in stance in the policy statement will be closely watched. This will be followed by the market’s much-watched US jobs data to be released on Friday.
The US dollar index surged, breaking above the crucial hurdle of 91 and made a high of 91.99. The 200-day moving average resistance at around 92 halted the rally and the index has come off slightly from there.
However, the support at 91.40 is holding well as of now, and the index has bounced back from the low of 91.48 on Monday. It is currently trading at 91.7. As long as the index remains above 91.40, the bullish outlook will remain intact. An eventual break above 92 will then increase the likelihood of the index extending its upmove towards 92.5 and 93 thereafter.
Such a rally in the dollar index will increase the possibility of the rupee breaking below 67 and revisiting 68 levels in the future. On the other hand, if the dollar index declines below 91.4, it can fall to 90.85. This fall may give a temporary relief to the rupee.
As said in this column last week, the support in the 66.90-67 region has held well and the rupee has got a breather. Since the currency has weakened sharply in a very short span of time, the possibility of the rupee remaining above 67 in the near term is high. While the rupee remains above 67, a recovery rally to 66.5 or even 66.2 is possible in the coming days. However, any further upmove of breaking above 66.2 looks less probable. A downward reversal from 66.2 will see the rupee weakening towards 66.9 and 67 again.
An eventual break below 67 can take the rupee lower to 67.2 initially. A further break below 67.2 will then increase the possibility of the rupee tumbling to 68 or even lower levels over the medium term.
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