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BL Research Bureau
The rupee (INR) on Friday closed the week without much change against the dollar (USD). The local currency ended the week at 71.37 compared to previous week’s close of 71.40. Taking a broader view, it can be noticed that the exchange rate has been oscillating between 71.1 and 71.5. By looking at the daily price action, a definite trend is unlikely to be established anytime soon.
Notably, the one-year forward spread of the USDINR currency pair has dropped from 282 points to 274 points, meaning that the dollar demand may be subdued in the forward market. This can go in favour of rupee.
Latest data
A host of data was released on Friday viz. foreign reserves, trade deficit and Wholesale Price Index (WPI) based inflation.
The weekly statistical supplement released by the Reserve Bank of India (RBI) on Friday showed that the total foreign reserves has gone up by $1.7 billion over the previous week. The total reserves increased to a fresh lifetime high of $473 billion from $471.3 billion. Foreign Currency Assets (FCA), the largest component of the reserves went up by nearly $2 billion to $439.2 billion from $437.2 billion in the same period. With high foreign reserves, the RBI will be able to stem unusual volatility in the exchange rate and maintain price stability.
Official data showed that the trade deficit for the month of January 2020 stood at $15.17 billion. Though not much had changed compared to January 2019 level of $15.07, on sequential basis there was a considerable increase. In December the trade deficit came in at $11.25 billion. Increasing trade deficit would mean net monetary outflow weighing on the rupee.
Like the Consumer Price Index (CPI) based inflation, the WPI based inflation too have gone up. For the month of January 2020, the inflation rose to 3.1 per cent versus 2.76 per cent for the corresponding month last year. Rising inflation can act as a drag on the local currency.
Dollar index
The dollar index rallied last week, and it has gained for the past two consecutive weeks. Currently trading at 99.12, the index faces a resistance at 99.15. If it breaches that level, it can retest its previous high of 99.66, which is the high since May 2017. Beyond that level, it can advance towards the crucial level of 100. But if the index witnesses a correction, the support levels are spotted at 98.7 and 98.5.
Trade strategy
The rupee has opened slightly lower today, at 71.44 versus Friday’s close of 71.37; and, it is hovering around the key level of 71.4. The domestic currency has a support at 71.5. So, considering the risk reward ratio, rupee longs can be favourable for intraday trading. Also, the dollar index is trading near a resistance which can result in dollar softening. Hence, for intraday, traders can initiate fresh long positions in rupee with stop-loss at 71.6.
Supports : 71.5 and 71.6
Resistances: 71.2 and 71.1
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