Currency Call. Fed go-slow gives rupee a breather

The Indian rupee, which was threatening a bearish break below 64.30 last week, got a breather towards the weekend, thanks to US Federal Reserve Chair, Janet Yellen. Her comment that the economic developments in the US warrant a rate hike some time this year, but that increases in rates thereafter could be gradual, saw the dollar tumbling against its peers last week.

The Indian rupee opened at 64.15 on Monday and fell to a low of 64.30 on Tuesday. It looked to be in danger of the 63.30-64.30 range on the downside as it continued to trade below 64. But the outcome of the US Fed meeting on Wednesday came as a saviour and helped the currency breach its resistance at 63.75. It strengthened thereafter to 63.52 on Friday before closing at 63.56, up 0.78 per cent for the week.

Domestic data releases had no impact on the market as the market was waiting for the Fed meeting on Wednesday. The Wholesale Price Index (WPI) was released on Monday and trade data was out on Tuesday. The WPI continued to stay in negative territory for the seventh consecutive month, at minus 2.3 per cent for May. India’s trade deficit narrowed slightly to $10.41 billion in May, down from $10.99 billion in April and $11.23 billion a year ago.

But falling exports continue to remain a worry as exports fell by 20.2 per cent in May, compared to the previous year. With crude oil reversing higher now, unless there is a strong revival in exports, room for the deficit to improve from here is limited.

The US and Greece are going to be the two major drivers of the currency market in the coming week. At present, there has been a huge uproar about a Greek default only in the media, but the currency market has been shrugging this off.

But as the June 30 deadline for loan repayment nears, developments in Greece could sway financial markets, particularly currencies. Any sharp sell-off in the euro could trigger panic all around and the rupee too could feel the heat and come under pressure.

Following the Fed meeting last week, economic data releases in the coming weeks from the US will need a close watch to get clues on the timing of the rate hike. The housing numbers and GDP are the important data points due for release from the US this week. The first quarter GDP data on Wednesday will be interesting to watch as the Fed has revised lower its growth projection for 2015 to 1.8-2.0 per cent from 2.3-2.7 per cent projected in March.

The short-term outlook for the dollar index (94) is bearish. With resistance at 95, the index can fall to the next support at 93. A break below this support can drag it further lower to 92.5 and 92.2. The global weakness in the dollar along with a bullish triangle breakout on the rupee chart could help the rupee to remain strong but within its 63.30-64.30 range.

A series of supports is available to the rupee in the 63.75-63.90 zone. Immediate resistance is at 63.4, a break of which can take the rupee higher to 63.3 and 63 in the coming week. The level of 63 is a strong resistance on the daily and the weekly chart as well which could limit the strength in rupee and restrict it from moving further higher to 62.75 – the target level of the triangle pattern.

The medium-term bearish view reiterated in this column still holds good, with strong resistances for the rupee at 62.5 and 62. However, the key level of 64.30 has to be breached for the currency to fall to the next target of 64.83 — a key Fibonacci retracement support level.

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