Currency call: Rupee nears a short-term hurdle

The Indian rupee continued to be under pressure. It fell to 59.45 in the initial part of the week before staging a recovery in the later part. The currency closed at 59.18 on Friday, slightly lower by 0.14 per cent for the week.

The macro economic data releases last week are giving hopes that the Indian economy is on the path of revival. The manufacturing production managers’ index (PMI) increased slightly to 51.4 in May from 51.3 in April. The service PMI moved into the expansion phase -- a level above 50 -- after nearly a year. The reading was 50.2 in May from 48.5 the month earlier.

The Reserve Bank of India (RBI) left the key policy rates unchanged. However, it has provided liquidity by cutting 50 basis points from the statutory liquidity ratio. The move to allow foreign portfolio investors to participate in the currency derivatives market to the extent of their underlying exposures plus an additional $10 million will help the trading volumes in currency futures to improve.

The remittance limit under Liberalised Remittance Scheme (LRS) has been increased to $125,000 from $75,000. Last year, in August, the LRS limit was reduced to $75,000 from $200,000 as one of the measure to control the huge volatility in the forex market which saw the rupee tumbling to 68.85.

Currency market will keenly await the consumer price inflation, industrial production and the trade data release due this week.

Foreign institutional investors (FIIs) continue to provide support for the rupee. FIIs buying $1 billion in debt and $951.9 million in equity in the past week helped rupee to recover in the later part of the week.

The European Central Bank (ECB) last week cut its key benchmark rates to a record low of 0.15 per cent from 0.25 per cent. It also introduced negative interest rates (-0.1 per cent) for bank deposits along with other stimulus measures. The euro tumbled immediately after the ECB announcement, but then recovered almost all its loss within a short span of time after testing 1.35 levels. The currency has strong resistance at 1.3730. Only a strong breach of this level will turn the outlook bullish for the euro.

The dollar index (80.43) turned volatile as it fell sharply after testing 81 following the ECB meeting. Key supports for the index are at 80.25 and 80. There is does not appear to be any threat to the index in near future and it can rise to test 81.25 while it remains above these support levels. On the other hand, the Bloomberg-JP Morgan Asian dollar index (ADXY) has risen sharply for the second consecutive week. It has closed just below its crucial resistance level of 116. This implies that the Asian currencies are strengthening against the greenback. The outlook will turn very bullish if the index records strong close above 116 this week.

An inverted head and shoulder pattern is visible on the weekly candlestick chart. A strong close above 116 will confirm this pattern and can take it higher to 117 initially and then to 118 which is the target of this pattern. The probability to breach 116 remains high as the index has reversed higher last week from the 21 day moving average support level after an initial dip last week. This is a positive for the rupee.

The reversal from the low of 59.45 last week lacksstrength. Rupee can strengthen this week to test 59. A breach of 59 can take it higher to 58.8.

However, the short-term strength in the rupee could be limited to 58.8. A reversal from either 59 or 58.8 can take it lower to 59.5.

For the medium-term, as long as the rupee trades above 60, the chances are still open for it to strengthen to 58 again. But rally beyond 58 might not be very easy. The presence of the 100-week moving average and the 61.8 per cent Fibonacci retracement level around 58 makes this level a strong resistance for the rupee. A reversal from here will have the potential to drag the rupee lower to 61-62 levels once again.

COMMENT NOW