Currency Call. Rupee nears a critical hurdle

The rupee ruled supreme this week. The currency closed higher for the fourth consecutive week, its longest winning streak since May 2014. It continued to remain insulated from the global dollar strength all through this month, even after last week’s quantitative easing (QE) announcement from the European Central Bank (ECB).

The Indian rupee opened the week on a strong note with a gap up at 61.62 and fell to a low of 61.90 on Tuesday. But the currency gained momentum and rose to a high of 61.37 on Friday before closing at 61.43, up 0.71 per cent for the week.

With no major macro economic data releases, the Indian rupee was largely driven by the strong 4 per cent rally in the stock markets and foreign inflows. Foreign portfolio investors (FPIs) continue to pump money into both debt and equity markets.

Last week, they bought $651.72 million in debt and $930.99 million in the equity segment. The debt segment has attracted inflows of $2.45 billion so far in January and helped the currency move 2.62 per cent higher against the dollar.

The fiscal deficit data will be the key domestic data release, scheduled for Friday.

Though the Indian rupee has remained unhurt from the global dollar strength, a few key global events may negatively influence the currency. Two key events will therefore need a close watch, as they could influence the rupee’s movement.

The first is any uncertainty in the election outcome in Greece. This could further hurt the euro, which was already beaten down over 3 per cent last week after the QE announcement by the ECB. It could then push the US dollar higher from current levels.

The second key event is the outcome of the US Federal Reserve meeting on Wednesday. It will be important to see whether there is any change in the Fed’s language of “being patient” in beginning the interest rate hike.

The dollar index (94.76) has surged for the sixth consecutive week. The euro tumbled over 3 per cent during the week after the ECB stimulus announcement helped the dollar index surge 2.4 per cent last week. The euro (1.12) is weak and could fall further to 1.10 this week, where some support is seen. A reversal from here could take the euro higher to 1.15 in the short term. However, the overall bearish view remains intact and a break below 1.10 could drag the euro towards parity in the coming months. The dollar index has resistances at 95.75, which is the 50 per cent Fibonacci retracement level. A strong break above this hurdle could take the index further higher to the next target of 97. But on the other hand, inability to breach 95.75 could pull the index down to 94 or even lower in the coming weeks.

The short-term outlook continues to remain bullish for the Indian rupee.

The 100-day moving average support at 61.86 is the key support for the rupee. As long as the currency trades above this level, it can move further higher to test 61.11 — the 50 per cent Fibonacci retracement resistance level — this week.

On the other hand, if the global events jolt the currency market and if it breaks below 61.86 following this, we can see the rupee weakening to 62 or even 62.2 in the short term.

But on the charts, the bias is bullish, which could see the rupee strengthening to 61.11 first before witnessing any weakness. That said, caution is required in the coming days as the currency is nearing a key medium-term hurdle at 60.9.

An immediate break above this level looks unlikely and it is expected to halt the current strength in the currency.

A reversal from here will have the potential to take the rupee lower to 62 or even 63 levels in the medium term.

COMMENT NOW