Currency Call. Rupee in a vulnerable position

It was a mixed New Year week for the Indian rupee. There was a hang-over after a sobering fiscal deficit data release on the first day of the year, but it was followed by a party, thanks to strong PMI data.

The currency opened on weaker note at 63.65 on Monday, with lingering fears of a sharp fall. However, things turned around on Tuesday as it gained ground after recording a low of 63.79 and strengthened to 63.04 on Wednesday, December 31. But the party was cut short after the release of fiscal deficit data that showed the deficit for the April-November period touched ₹5.25 lakh crore, or 98.9 per cent of the full-year target of ₹5.31 lakh crore.

Subsequently, the currency reversed lower again from the week’s high of 63.04. However, the strong HSBC Purchasing Managers’ Index (PMI) data on Friday helped in limiting the downside.

The index surged to a two-year high of 54.5 in December from 53.3 the month earlier, providing some relief.

Thanks to this, the rupee managed to pare some of its losses and close at 63.3 on Friday, up 0.43 per cent for the week. For the year 2014, the rupee was down about 2 per cent against the dollar. The high fiscal deficit has raised doubts about the government’s ability to meet its deficit target of 4.1 per cent of GDP. This is a concern for the rupee.

Also, foreign portfolio investor (FPIs) flow remained subdued in the New Year week. The FPIs bought $167.77 million in equities and sold $111.21 million in the debt segment.

That said, the year 2014 saw record inflows of $42.41 billion; of this, $26.25 billion came into debt and $16.16 billion into equities.

The major threat for the Indian rupee going into 2015 is if the strong inflows of 2014 would go out in 2015 as the US starts to hike interest rates.

The market awaits the HSBC Services PMI data, due for release on Tuesday this week.

The dollar index (91.15) surged 1.2 per cent last week and recorded a strong close. We have to thank European Central Bank President Mario Draghi for the gain in the dollar index.

His statement in an interview to a German newspaper indicating that the ECB is gearing up for more stimulus saw the euro tumbling to 1.9996 on Friday, its lowest level since June 2010, helping the dollar index to move higher.

With this strong rally last week, the US dollar index has comfortably risen above its crucial resistance at 89.8. The outlook is bullish as long as the index remains above 90. Chances are good for it to touch 92.3 in the near term. Also, as long as the index sustains above 90, the rally can very well extend to target 95 in the coming months. A strong dollar could keep the upside limited for the Indian rupee. The US non-farm payroll release on Friday will be a crucial data series to watch this week.

The reversal from 63.04 last week is technically very significant as it happened from just below the 21-day moving average resistance level, which is currently at 62.98. This could keep the rupee under pressure. Although there is some support near 63.5, the currency looks vulnerable. A break below this level will see the rupee weaken to 63.7 this week. It will also keep the doors open for a test of 64 in the short term.

On the other hand, if the rupee manages to sustain above 63.5, it can gain ground to test 63 once again this week. The short-term outlook will turn bullish only if the rupee records a strong close above 63, in which case it can strengthen to 62.5. But the chances of seeing a strong rupee are bleak, given the overnight surge in the dollar index on Friday.

There is no change in the bearish medium-term view. There is a strong resistance at 62.5 and 62 for the rupee. As long as the rupee trades below these levels, a fall to 64.83 — the 61.8 per cent Fibonacci retracement level — looks likely in the medium-term.

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