Currency Call. Rupee set for an action-packed week

The Indian rupee remained stuck in the 63.30 and 64.30 sideways range for the sixth consecutive week. But the weekly close below 64 for the first time since September 2013 may be a sign that a bearish breakout below 64.30 could still be on the cards.

Last week, the rupee opened on a weak note at 64.04. However, global weakness in the dollar helped the currency gain ground and strengthen to 63.75 by Thursday. But the sharp sell-off in the Indian equity market played spoilsport. The benchmark indices tumbling over 5 per cent in just two trading days, Thursday and Friday, had the rupee tumbling below the psychological level of 64 to record a low of 64.14 on Friday. The currency had closed the week at 64.06, down 0.48 per cent for the week.

Domestic data watch Weak Indian equity markets, on the back of foreign investor pullouts, overshadowed the good Current Account Deficit (CAD) data released last week. The CAD for the fourth quarter of 2014-15 narrowed to $1.3 billion from $8.3 billion in the third quarter. The merchandise trade deficit shrinking from $39.2 billion in the third quarter to $31.7 has helped the CAD to improve. But the recent reversal in crude oil prices, which could make Indian imports costlier, and falling export data may prevent a further improvement in the merchandise deficit number in the coming quarters.

The Index of Industrial Production (IIP) and the Consumer Price Index (CPI) inflation data were released on Friday. The IIP surged 4.05 per cent (year-on-year) in April compared with a 2.5 per cent rise in March and surprised most forecasters who has estimated much lower growth. The CPI for May increased to 5.01 per cent from 4.87 per cent in April, but the food component within it remained below estimates. The data was released after the markets had closed on Friday. But if the sell-off in the equity market sustains, then currency movements may continue to be dictated by equity market moves rather than this data. The Wholesale Price Index (WPI) inflation data release is due today (Monday).

Any further sell-off in equities, especially by Foreign Portfolio Investors (FPIs), could add to pressure on the rupee. They had sold $241.55 million in the debt and $463.81 million in the equities segment in the past week.

The price action in rupee on the charts suggests that the six long weeks of sideways consolidation is nearing an end.

But what could trigger a breakout on either side? The much-watched US Federal Reserve meeting is scheduled for this week. The outcome of this meeting on Wednesday could be a possible trigger.

Recent economic data releases, especially housing data, are showing a pick-up in the US economy. New home sales data released in the last week of May showing a stronger rise than expected by the markets could make for a more optimistic Federal Reserve, which in recent weeks has been concerned about the sluggish growth in the housing sector. Adding to this is the retail sales data released last week. US retail sales in May have increased 1.2 per cent, with numbers for the previous two months, April and March, also revised higher. With these signs of the US economy picking up, the Fed meeting this week is expected to provide signals on future rate action.

Any change in the language of the policy statement in favour of rate hikes could trigger a sharp sell-off in non-dollar currencies.

Dollar outlook The dollar index (94.97) fell sharply at the beginning of last week from a high of 96.5 to a low of 94.3. However, it has remained range-bound thereafter. The immediate outlook is not clear. The index could continue to trade in a range until the outcome of the US Federal Reserve meeting on Wednesday is known.

Support is at 94 and resistance is at 96. A breakout on either side of 94-96 will decide the next trend for the index.

Rupee outlook The short-term sideways range of 63.3 and 64.3 remains intact. But as mentioned above, the price action on the daily chart is signalling a possible breakout in the coming week. If the rupee weakens, key supports are at 64.25 and 64.30. A break below 64.30 can see the rupee weakening to 64.83. Such a fall breaking the current range could be sharp and swift.

On the upside, there is strong resistance poised at 63.75. The currency will gain strength only if it surpasses this hurdle in the coming days. The next targets will be 63.50 and 63.30. Confirmation signals on the charts look to be strengthening the medium-term bearish case for a fresh fall to the levels of 67-68.

The weekly close below 64 on the line chart gives initial signals of the head and shoulder reversal pattern. Further fall and a decisive weekly close below 64.3 will confirm this pattern. If this happens, and the rupee also breaks below its key medium-term support at 64.83 – the Fibonacci retracement level, a fall to 68.6 would be on the cards. The neckline resistance of this pattern for the rupee is poised at 63.75.

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