Dollar falls but rupee lags

Appetite for high risk in the market has continued to keep the US dollar under pressure. The US Dollar Index was beaten down 1.1 per cent and has closed the week at 90.71.

Hopes for another virus relief package from the US and progress on the Covid-19 vaccine are keeping the risk appetite elevated and this has taken risky assets such as non-dollar currencies and equities sharply higher.

The euro has surged, breaking above the crucial level of 1.2050 and gaining 1.3 per cent. It closed the week on a strong note at 1.2122, up 1.3 per cent for the week. The Dow Jones Industrial Average, up 1 per cent for the week, closed at its record high of 30,218.26.

Data watch

The US non-farm payroll data released on Friday failed to meet market expectations. The US added just 245,000 jobs as against market expectations for an increase in non-farm payrolls by 500,000.

Earlier during the week the Manufacturing Purchasing Managers’ Index (PMI) showed a dip to 57.5 in November from 59.3 in the previous month. Weak economic data releases in the past week from the US have strengthened the case for releasing the next virus stimulus package at the earliest.

So the development in the talks this week for the $908-billion stimulus package will need a close watch.

The European Central Bank (ECB) meeting will be a major event to watch out for this week. The ECB is likely to keep the rates unchanged. However, it will have to be seen if it makes any change in its Pandemic Emergency Purchase Programme (PEPP). Currently the PEPP’s total quantum is €1,350 billion that will be in place up to June 2021.

Equities, yields rise

Expectations on the next stimulus continue to support the US equities and US Treasury yields. The Dow Jones Industrial Average rose past 30,000 last week and the US 10-year yield at 0.97 per cent edged closer to the crucial level of 1 per cent. Whether the 10-year yield can rise past 1 per cent will merit a close watch this week.

Positive sentiment can take the index higher in the coming days. There is room for the Dow Jones to test 30,800-31,000 in the near term. But the level of 31,000 is a strong resistance and that is likely to pause the current rally. A reversal from 31,000 will be a good sign of seeing a sharp corrective fall to 28,000 or even lower in the coming months.

The surge in Covid cases in the US and any disappointment on the stimulus front will need a close watch to see if this can be a possible trigger for the long-pending correction in the equities.

Support for dollar

The US Dollar index (90.71) has a strong near-term support in the 90.10-90.00 region. This support can be tested in this week or the next. If the dollar index manages to sustain above 90, a corrective bounce to 91 or even to 92 is possible thereafter.

Similarly, the euro (1.2122) has room on the upside to test 1.22 and 1.23 — an important resistance — in a week or two. This resistance at 1.23 is likely to hold on its first test. There is a strong likelihood of the euro witnessing a corrective fall from 1.23 to 1.21-1.20 towards the end of this month or early in January.

Rupee lags

On the domestic front, the Sensex and the Nifty 50 surged to record highs following the global markets. But the weakness in the US dollar failed to transform completely into a strong rupee.

Although the rupee strengthened to 73.43 initially, the currency gave back some of its gains in the second half of the week.

The rupee closed the week at 73.8025. The presence of the central bank in the market continues to cap the strength in the rupee.

For now, 73.50-73.45 is a good resistance for the rupee. As long as the currency remains below 73.45, the chances are high for it to weaken towards 74 and 74.15/74.25 in a week or two. A strong break above 73.45 is needed to the rupee to regain momentum and strengthen towards 73 levels.

The writer is Chief Research Analyst at Kshitij Consultancy Services