Currency Call. Rupee waits for a trigger

The Indian rupee continued to swing wildly in the range between 63.30 and 64.30 for the fifth consecutive week. All that the rupee now needs is a strong trigger that could cause a breakout of this range. Can the strong US job numbers released on Friday cause this? We will have to wait and see.

The rupee opened the week at 63.78 and fell to a low of 64.27 on Thursday. A deficient monsoon forecast and hawkish signals from the Reserve Bank of India (RBI) led to an equity market sell-off. This disappointed the markets, despite the RBI announcing a 25-basis-point rate cut in its policy as expected. The Indian benchmark indices tumbled about 4 per cent last week and put the currency under pressure.

However, the rupee managed to regain some ground from its low in the final trading sessions of the week and close at 63.76 on Friday, up 0.11 per cent for the week. But the currency could lose momentum if the sell-off in the Indian indices intensifies further this week. This cannot be ruled out.

On the domestic front, the much-watched Consumer Price Index (CPI) inflation and the Index of Industrial Production (IIP) data are due for release this week on Friday. Apart from this, developments on the monsoon, which has arrived with a four-day lag this year, will also need a close watch.

Two major factors which are giving out threatening signals for the rupee will merit monitoring in the coming days. One is the strong economic data releases from the US which are strengthening the case for a rate hike this year. The latest data release shows that the US housing sector is gathering momentum. The US non-farm payroll in May has also surged, beating market expectations. This data release on Friday took the dollar higher against major currencies. A key development in the jobs data last week was employee earnings which are showing signs of a pick-up after remaining subdued for about three years now. A further pick-up in the earnings over the next few releases could add a further boost to the dollar.

Following strong data releases from the US, the Indian rupee could take cues from it and open on a negative note today. With all these positive developments, the Federal Reserve meeting next week on June 17 is a very important event to watch out for.

The second factor is steady Foreign Portfolio Investor (FPI) selling of Indian debt in recent times. After staying on hold for two weeks, FPIs turned net sellers of Indian debt again last week. They sold $293.16 million worth of paper. FPIs have turned net sellers after consistently buying Indian debt for 12 consecutive months.

They sold about $1.3 billion in the month of May. Further sell-off could limit the strength in the rupee and see the currency weakening going forward.

The dollar index (96.35) has made a smart recovery from its intraweek low of 96.65. A rise is possible this week to test its next key resistances at 97.6 and 98. Important support for the index is at 95. Only a decisive break and close below this support will put the index under pressure for further fall. Both the euro (1.11) and the British pound (1.525) have important supports ahead. Whether these supports hold or not will decide the movement in these currencies.

The euro has support at 1.10 which has to hold in order to keep the chances alive for the currency to revisit 1.15 levels. But a break below this support will be bearish for the euro to fall to 1.08 and even 1.06 thereafter.

The British pound has important support at 1.515. A break below this can drag it to 1.50 or even lower levels. Among the major currencies, the Japanese yen (125.5) looks very weak. It has declined below its important support at 125. It looks vulnerable for a further fall to 130 in the coming weeks. The outlook for the major currencies suggests that there is no immediate danger visible for the dollar index in the near term.

The short-term sideways range of 63.3 and 64.3 remains intact. A breakout on either side of this range will decide the next leg of move for the rupee.

The rupee has a series of immediate resistances in the 63.65-63.50 zone. Given the global strength in the dollar, there is likelihood that the resistances may limit the upside for the rupee this week. A reversal from here can see the rupee weakening to 64 and 64.25 levels once again. However, if it manages to breach 63.5, then it can strengthen to 63.3. A further break above 63.3 can take it higher to 63 thereafter.

A decisive daily close below 64.15 would be a signal for the rupee to break the short-term range and decline below 64.3. A strong weekly close below 64.3 will confirm this breakout. The next target will be 64.83 — the key medium-term Fibonacci retracement support level for the rupee. Such a fall will also confirm a head and shoulder reversal pattern on the weekly chart. It will then keep the rupee pressured for a further fall to 66-67.

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