Currency Call. Rupee’s rally could be short-lived

After a turbulent week, the Indian rupee took a breather last week. The currency opened at 63.86 on Monday and fell to a low of 64.26 on Tuesday.

However, the rupee recovered smartly from this low and recorded a high of 63.45 on Friday before closing at 63.52, up 0.66 per cent for the week. Weak retail sales data release from the US on Wednesday took the dollar index (93.23) sharply lower last week. This raised hopes that the US Federal Reserve might not be in a hurry to increase interest rates. The dollar index fell 1.6 per cent last week.

On the domestic front, easing inflation and weak industrial production data release last week lifted hopes of another rate cut by the RBI.

The keenly watched Consumer Price Index (CPI) inflation cooled to 4.87 per cent in April from 5.25 per cent in March. The Wholesale Price Index (WPI) inflation continues to hover in the negative zone for the sixth consecutive month. It eased to minus 2.65 per cent in April from minus 2.33 per cent in the previous month.

Worries remain The Index of the Industrial Production (IIP) grew at a slower pace of 2.1 per cent in March after posting a 4.88 per cent growth in February.

Rate cut expectations gave some respite to the Indian stock market. But it is not out of the woods yet. Although the benchmark indices closed marginally higher last week, Foreign Portfolio Investors (FPIs) remained net sellers for the third consecutive week. They sold $170.89 million in the Indian equity segment last week. FPIs were net sellers in the debt segment as well, selling $525.31 million.

A big sell-off could send the stock market into a tailspin once again and put the rupee under pressure. The other factor that could keep the market in tenterhooks is the trade data that was released on Friday. In April, India’s exports stood at $22.054 billion, down 13.96 per cent (year-on-year) and imports fell 7.48 per cent to $33.047 billion.

Although the trade deficit narrowed to $10.99 billion in April from $11.79 billion in March, falling exports is a cause for worry. Also, crude oil price inching up over the last few weeks can result in a higher import bill — a negative for the rupee. In the week ahead, the Indian market is likely to take cues from the trade data released last Friday after market hours.

Dollar outlook The dollar index remains bearish. Key resistances are at 93.75 and 94.5 which can cap the upside for the index in the short term. A break below 93 can drag the index further lower to 92.5 and even 92 in the coming week. The US housing sector data release is due this week and could influence the dollar index movement.

The euro (1.145) and the British pound (1.5720), the two major components of the dollar index, are looking bullish. The euro has surged over 2 per cent last week against the dollar. The outlook is bullish and it can target 1.16 in the short-term. The pound has risen 1.9 per cent last week. It can extend its rally to the next targets of 1.59 and 1.60 against the greenback. A rally in these two currencies can keep the dollar index under pressure and take it lower in the coming days.

This may or may not help the rupee because the movement in the Indian rupee (barring last week) has largely been influenced by domestic factors and not by the global dollar movement.

Rupee outlook The Indian rupee falling below 64 for two consecutive weeks but not recording a close below this psychological level is a positive. A double bottom reversal pattern is visible on the daily chart which suggests that a sharp fall in the rupee in the near term is unlikely. The currency can move higher to test its next resistance at 63.2 this week.

A break above 63.2 can take it higher to 63. However, the short term strength in the rupee could be limited to 63. On the weekly chart the 50- week moving average has just touched the 100-week moving average and has started to diverge higher again. This is a bearish signal for the rupee. A reversal from 63 will see the rupee weakening to 64 and 64.3 levels once again.

Key short-term support for the rupee is at 64.3. A strong break below this level can drag it lower to 64.55 and 64.83 in the short term.

The level of 64.83 — the 61.8 per cent Fibonacci retracement support for the rupee — is a key level to watch in the medium term. A reversal from here could give a temporary respite and take the rupee once again to 63.5 and 63 levels. But the chance of such reversal looks less probable.

On the other hand, a strong and decisive weekly close below 64.83 can take the rupee lower to 66-67 in the medium term.

It will also confirm a head and shoulder pattern on the charts. In such a scenario it should not be surprising to see the rupee fall to fresh lows in the coming months. The target of the head and shoulder pattern is 69.5.

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