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Rupee was under duress again over the past week, declining 0.65 per cent against the greenback. Lower headline inflation figures did not help the currency. Higher trade deficit numbers for January and strength in the dollar index added to the downward pressure on the rupee.
Wholesale price index was at 38-month low of 6.62 per cent in January. But hopes of a cut in policy rates were dashed after RBI Governor D. Subbarao said that he sees limited room for interest rate cut as food inflation is still not at a comfortable level. Trade deficit for January was higher at $20 billion compared to $17.6 billion for the previous t month.
Employees of few state-owned banks may go on strike on Wednesday and Thursday, thus affecting total traded volumes. Dollar gained around 0.8 per cent against Euro for the week. Reports that the ECB President is in favour of exchange rate stability to boost growth, led to expectation that he might not prefer a strong Euro till the euro region comes out of the woods.
Dollar index strengthened to 80.65 compared to 80.10 last week. One-month implied volatility for rupee, a measure of expected moves in exchange rates that is used to price options, increased by 2 basis points to 9.30 for the week. Three-month onshore rupee forwards were at 55.28 a dollar and offshore non-deliverable contracts were at 55.27 a dollar on Tuesday compared to 54.76 and 54.65 respectively last week.
Technical Analysis
The rupee declined against the greenback to hit the low of 54.2 on Tuesday. The Indian currency could not strengthen beyond the key medium term hurdle at 53 reinforcing the fact that the long-term trend in the currency remains down.
Immediate support that needs to be watched is at 54.7. Decline below this level will mean that the depreciation will continue pulling the currency lower to 56.7, 57.3 and below that to 58.9.
The long-term trend for the currency pair has been down since the July 2011 peak of 43.8. Key long-term resistance for rupee exists around 52. Any rally in the following months is likely to face resistance around this level.
Sideways move between 52 and 57 for few months will be construed as a consolidation phase prior to a break downward.
USD INR future
The USD INR futures moved to a high of 54.47 on Tuesday. The contract faces immediate resistance at 54.47 and 54.8. Traders can book partial profits if the contract is unable to move beyond these levels.
Fresh long positions should be initiated only on close above 54.8. Short-term supports are at 53.9 and 53.6.
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