Currency Call. Rupee remains on tenterhooks

The rupee continued to trade below 62 last week — a truncated week with just three trading days. The markets were closed on Tuesday and Thursday for public holidays.

The rupee opened at 62.16 and strengthened to 62.08 on Monday. Failing to gain momentum, the rupee reversed lower again and fell to a low of 62.35 on Wednesday before closing at 62.22 on Friday. It was down 0.04 per cent for the week.

The clamour for further rate cuts gained momentum with the Wholesale Price Index (WPI) for January slipping into the negative territory, falling 0.39 per cent against the marginal 0.11 per cent rise in December.

Though rapidly decelerating inflation is fuelling market expectations for another rate cut, high food prices may keep the Reserve Bank of India in wait and watch mode. Food inflation in January shot up to 8 per cent from 5.2 per cent in December.

However, as long as rate cut expectations remain alive, foreign portfolio flows into debt markets may continue. Last week, there was more FPI action in debt than in equities. FPIs bought $207 million in debt and $61.2 million in the equity segment.

The Greek debt crisis, which had the market under tizzy the whole of last week, has eased up a bit. Greece is in the process of hammering out a deal with Eurozone nations for an extension of the financial aid for four months, but with certain conditions attached.

Greece will have to prepare a list of reforms by Monday night that will be reviewed by Eurozone officials. If these reforms fail to satisfy the officials, then there is a danger of this deal falling through, leading to fresh uncertainty. Such a scenario can induce a fresh bout of market jitters and trigger a sell-off in risky assets. The rupee could come under renewed pressure in such a case.

Even if the reforms go through, the current deal will provide only a temporary relief for the markets, as the crisis talks will have to be revisited in four months.

The dollar index (94.25) has been stuck in a narrow range of 93.8-94.8 in the past week. The immediate outlook is not clear. The minutes of the US Federal Reserve’s January meeting released last week failed to provide any support for the dollar.

The minutes revealed that the policy makers are concerned about low inflation.

This suggests an inclination to keep rates near zero for more time, and a lack of incentive to raise the rates. There was no negative impact on the dollar index following this minutes release as the concerns on Greece kept the markets in a risk-averse mood.

The dollar index may meet resistance at 95 and has a key support at 94. A break out on either side of 94-95 will decide the trend for the index. A break below 94 will increase the danger of a fall to 92.

A break through of 95 will be a bullish indicator and may take the index higher to 95.45 initially. Crossing 95.45 will open the doors for a rally all the way to 97.

A slew of key economic data releases are due from the US this week. Existing home sales data is expected on Monday and new home sales data is scheduled for Wednesday.

Since the US Federal Reserve is concerned about the housing slow down strong housing numbers this week could help the dollar index break above its resistance at 95 and rise further. The GDP data is due for release on Friday.

The rupee is expected to remain under pressure. Immediate resistance is at 62.15 and then at 62, which are technically strong resistances on the charts.

As long as the rupee trades below 62, a fall to 62.45 looks likely in the coming week. A fall below 62.45 can drag the rupee further lower to 62.6 and 62.8 in the short term.

The short-term outlook for the rupee will turn bullish only if it breaches its hurdle at 62. Such a break can take the rupee higher to 61.8 initially and then to 61.5 .

The medium-term view continues to remain bearish for the rupee with a strong resistance at 61. Key support for the currency is at 62.8. A fall below this level will see the rupee weakening to 64 in the medium term.

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