Technical Analysis

Dollar weakens as euro recovers

Gurumurthy K | Updated on April 10, 2021

Rupee tumbles after the Reserve Bank of India maintains status-quo on repo rates

The US dollar remained under pressure all through the week as the Euro extended its recovery. It was the Indian rupee that stole the show with heightened and unexpected volatility. The rupee tumbled below 74 last week after the Reserve Bank of India’s monetary policy outcome on Wednesday. The currency fell to a low of 74.94 and closed at 74.74, down 2.2 per cent for the week.

Policy outcome

The RBI on Wednesday last week left the policy repo rate unchanged at 4 per cent. The trigger for the volatility in rupee movement came from its announcement of bond purchases.

The central bank said it will do a secondary market Government Securities (G-Sec) Acquisition Programme (G-SAP) for a quantum of ₹1 lakh crore in the first quarter of this fiscal. This triggered a sharp fall in the Indian 10 year G-Sec yields and in turn dragged the Indian rupee sharply lower.

The Indian 10-year G-Sec yield (6.0147 per cent) fell sharply below the key level of 6.10 per cent. It made a low of 5.95 per cent on Friday before bouncing back to close above 6 per cent. The view is bearish for the yield to fall back below 6 per cent and decline towards 5.92 per cent-5.90 per cent in the coming weeks.

The Indian rupee fell sharply below the key level of 73.50 and extended the fall well beyond 74. The currency tumbled to a low of 74.94 and had recovered slightly to close the week at 74.74 level. This has negated the earlier bullish view of seeing 72.60 on the upside mentioned last week.

An immediate support is at 74.95 which has held well last week. As long as the rupee sustains above 74.95, a corrective rally to 74.45-74.40 is possible in the coming week. A break above 74.40 can take the rupee further higher towards 74.20. However, the broader picture has turned weak after last week’s sharp fall. As such, the upside in the rupee is likely to be capped now. The currency can weaken towards 75.15 and can even revisit 76 levels in the coming weeks.

Euro rises, dollar weak

The Euro (1.1902) has risen well, breaking above the 1.1850-1.1870 resistance zone mentioned last week. The danger of seeing a fall again to 1.17-1.16 stands reduced now. The 1.1860 will be a good near-term support. As long as the Euro manages to sustain above this support, a further rise to 1.2035-1.2050 is possible.

Any inability to breach 1.2050 can drag the Euro lower again and will keep the chances alive of revisiting 1.17 levels and also test 1.16 on the downside. A strong break above 1.2050 and a subsequent rise past 1.21 is needed to give an early sign of a trend reversal.

The US Dollar Index (92.18) extended the fall breaking below 93 last week. An immediate support is at the 92-91.80 region. A break below 91.8 can drag the index lower to 91.

On the other hand, a bounce from the 92-91.8 support zone, though less likely, can take the index back to 93 levels.

As mentioned last week, the dollar index can broadly remain in a range of 90-94 for some time with a bearish bias to break below 90 eventually. Within this range the index is currently declining and can test the lower end of the range in the coming days.

Important data releases are due this week from the US that can influence the dollar movement. The US Consumer Price Index (CPI) inflation on Tuesday, retail sales and Industrial production on Thursday and housing starts on Friday will be watched this week.

The Dow Jones Industrial Average (33,800.60) had surged, breaking above the 33,500-33,550 resistance zone mentioned last week, contrary to our expectation. If the Dow manages to sustain this break, a further rise to 34,100 and even higher levels is possible. The Dow will now have to fall below 33,000 in order to come under pressure for a corrective fall.

However, from a bigger picture, the rally in the equities looks stretched. As such, it is better to be cautious rather than becoming more bullish at these levels.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on April 10, 2021

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