Rupee may not strengthen much in the short term

The support at 64.30 has held well for the rupee and the currency has strengthened from 64.32 in the past week. The rupee tested the psychological 64 level on Monday and reversed lower from there to close at 64.14.

Increasing political uncertainty in the US capped the strength in the dollar and helped the rupee gain in the past week. But two key factors might limit the rupee’s strength in the short term.

First is the increasing geo-political tension between the US and North Korea. Any new developments on this front which increases the noise in the market on a possible war may help the dollar gain on safe-haven demand. This, in turn, may trigger a sell-off in the rupee.

The second factor is the on-going correction in the Indian stock market on the back of the selling by foreign portfolio investors (FPIs). After buying Indian equities for six consecutive months since February, FPIs have turned net sellers so far this month.

They have been selling Indian equities over the last three consecutive weeks and sold over $1 billion in the past week alone. In August so far, they have sold $1.67 billion in the equity segment.

However, FPIs continue their buying spree in the Indian debt segment. They have bought $1.62 billion in debt so far this month. But the strong likelihood of the Indian benchmark indices correcting further in the coming weeks might weigh on the rupee and can cap the strength in the currency in the short term.

The annual economic policy symposium at ‘Jackson Hole’ between Thursday and Saturday will be a key event that the global currency market would be waiting to see this week.

US Fed Chair Janet Yellen and European Central Bank President Mario Draghi, both speaking at the symposium on Friday, may add to the volatility in the currency market along with the on-going geo-political tensions. Any hint from either of them on their future policy plans might affect the dollar index movement accordingly.

The dollar index has been stuck between 93 and 94 over the last couple of weeks. A break-out on either side of this range will determine the next move. A strong break above 94 can take the index higher to 94.5 and 95. On the other hand, if the index declines below 93, it can fall to 92.5 or 92.

The price action on Monday suggests that the rupee lacks strength to break above 64. Inability to breach above 64 can take the rupee lower to 64.30 levels once again in the coming days.

In such a scenario, the possibility of the currency falling below the 64.30-64.35 resistance zone will remain high. A strong break below 64.35 will see the rupee weakening to 64.50 and 64.70 in the short term.

On the other hand, if the rupee manages to break above 64, it can strengthen to 63.90 or 63.85 initially. Further break above 63.85 will increase the likelihood of the currency revisiting the crucial 63.60 resistance thereafter.