Currency Call. Rupee pulls back from the brink

It was a week of respite for the non-dollar currencies last week, after the recent rout. Markets calmed thanks to the US Federal Reserve indicating that it would not be in a hurry to raise interest rates despite removing the term “patient” from its statement. The Indian rupee opened on a flat note at 62.96 and recorded a low of 62.99 on Monday. Contrary to expectations for a fall below 63, the currency managed to sustain above 63 and strengthened throughput the week. The rupee made a high of 62.36 on Thursday before closing the week 0.8 per cent higher at 62.47.

Its was a quiet week on domestic data releases and the Wholesale Price Index (WPI) inflation was the only new data point out in the past week.

It fell for the fourth consecutive month to minus 2.06 per cent in February.

The data made no impact on the currency as the market was eagerly waiting to see the outcome of the US Federal Reserve meeting on Wednesday.

No major domestic macro economic data release is scheduled for this week either. However, more focus should now be shifting towards the economic data releases from the US which will offer cues on the Federal Reserve’s further course of action. The Fed has in recent policy meetings, consistently expressed concern about the slowdown in the US housing market. The housing starts number tumbled 17 per cent in February. Following this, data on US existing home sales and the new home sales data are scheduled for release today and Tuesday respectively. Following this the GDP data will be out on Friday.

“Export growth has weakened” was a new addition to the Fed’s long list of concerns in its statement released last week. Most market reports are not focussing much on this inclusion and are only obsessing over the removal of the term “patient”.

But this addition could be very significant. It is to be noted that a strong dollar may not aid US export growth. Any pickup in US exports in the coming months could also be one of the key indicators (apart from housing recovery) that could give an early tip-off to the US getting ready for a rate hike. US exports have been falling consistently for three months since November.

Foreign Portfolio Investors’ (FPIs) participation on the Indian market slowed down for the second consecutive week. They bought $194.48 million in the debt and $127.64 million in the equity segment. The Indian rupee has been largely supported by the huge and consistent foreign money inflows into the country for more than a year.

As the world is preparing to face the US rate hike, FPI action in the coming days will need a close watch. Rupee could come under pressure if the FPIs start to pull out money in a pre-emptive strike against rate hikes.

It was a volatile week for the US dollar index (97.8) last week. The outcome of the US Federal Reserve meeting on Wednesday had the index spiralling lower to 96.63 from near 100 levels. The index has tumbled over 2 per cent for the week. The 21-day moving average at 97 is currently providing support to the index. A decline below this level can take it lower to 96 in the coming weeks. The euro, British pound, Japanese yen – the three major components of the dollar index got temporary relief from their concerted downtrend.

The euro (1.0820) has staged a strong recovery, surging over 3 per cent against the dollar last week. The failure to extend the previous week’s fall below the key support level of 1.05 has improved the outlook for the currency. Short-term supports are at 1.07 and 1.07. The euro can revisit 1.10 levels in the coming days. Only a decisive fall below 1.05 will bring in fresh selling pressure in the euro.

The British pound (1.4930) has support at 1.47. It could be range bound between 1.47 and 1.50 in the short-term.

The Japanese yen (120) fell to a low of 122 and has reversed higher from there. It has the possibility of strengthening to 118.5.

As the near-term outlook is not very bearish for the major currencies, the dollar index might not breach the psychological 100 mark again, at least not anytime soon.

The danger of the rupee falling below 63 has eased slightly. However it is still not completely out of the woods. The current strength in the currency could be short-lived. Rupee has room to strengthen further to 62.35 and 62.2 this week. There is a possibility of a reversal from 62.2 levels. Any such reversal can see the rupee weakening again to 62.5 and 62.7. The medium-term view remains bearish with key resistances at 62 and 61. A break below 63 could add pressure on the currency and drag it to 63.6 and 64.

As mentioned last week, whether the rupee is going to breach 64 or not will decide the next leg of move. A reversal from 64 could ease the pressure and keep it within the broad 61-64 range. But if the rupee falls below 64, it can decline to 65 or even lower thereafter.

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