Will dollar continue its recovery?

It was a volatile week across the financial markets. The US treasury yields continued to surge and helped the US dollar to recover sharply towards the end of the week. Risk assets like the equities and non-dollar currencies witnessed a sharp sell-off in the second half of the week. The sell-off in the global equities last week is giving an early sign of a reversal. A further fall this week will need a close watch to get a confirmation on that. The treasury yields continue to look bullish and can continue to sustain higher. It will have to be seen if the greenback can sustain higher as the dollar index has a crucial resistance ahead. Overall, the volatility is likely to remain in place in the coming week as well.

Dollar recovers

The US dollar index (90.90) broke below the crucial support level of 90 on Thursday and was threatening for a fresh fall. But a sharp intra-day surge in the US treasury yields on Thursday aided the dollar index to claw back from the low of 89.68 and surge above 90. Immediate and crucial resistance to watch now is the level of 91. A break above this resistance can take the index further higher to 91.40-91.50. Such a break will also increase the chances of the index targeting 92 and even higher levels in the coming weeks. However, from a long-term perspective the upside in the dollar index is likely to be capped at a maximum of 93 and the broader trend is likely to remain down. As such, the current anticipated move up to 92 or 93 on a possible break above 91 will just be a corrective bounce within the broader down trend.

Euro falls back

Euro (1.2073) broke above the key level of 1.22 on Thursday and was turning bullish to target 1.23-1.2350. But the strong bounce in the dollar index dragged down the Euro further from the low of 1.2243. Important support is at 1.2020 which can be tested this week. Inability to bounce from 1.2020 and a fall below 1.20 will drag the Euro even lower to 1.19-1.1850. On the other hand, if the Euro manages to bounce from 1.2020, it can rise back to 1.21 and remain in a sideways range of 1.20-1.22 for some more time. The price action around 1.2020 will need a close watch.

Equities sell-off

The Dow Jones Industrial Average (30,932.37) rose to test the key resistance at 32,000 last week and has come off sharply from there as expected. The index tumbled from the high of 32,009 and closed the week below 31,000. As long as the index stays below 31,000, the near-term outlook will be bearish to see 30,500-30,000 on the downside. There are early signs of a reversal on the charts, but will need to wait for a confirmation. The price action around 30,000 will need a close watch. A break below 30,000 will confirm that a top is in place and will pave way for a further fall to 29,000 and even 28,000 going forward.

Yields surge

The US 10-year treasury yield continued to surge this week. It skyrocketed to an intra-day high of 1.61 per cent on Thursday and has come off sharply from there. It will have to be seen if this pull back extends below 1.40 per cent this week, which is needed to drag it further lower. A break below 1.40 can drag it to 1.30 per cent. However, from a bigger picture, 1.30 per cent and 1.20 per cent are important supports. As long the yields remain above these supports, the outlook will continue to remain bullish and rise to 1.55 per cent to 1.60 per cent can be seen again.

Rupee tumbles

The Indian rupee (73.47) broke above the key resistance level of 72.50 earlier last week and remained stable between 72.25 and 72.50 for most part of the week. But the sell-off in the Indian equities coupled with the strong recovery in the US dollar index above 90 dragged the rupee sharply lower on Friday. The rupee tumbled below 73 and closed the week at 73.47 in the onshore market. However, the currency extended the fall in the off-market on Friday up to 74.05 and is currently at 73.91. On the charts, 74 will be a very crucial level to watch on Monday, when the spot market reopens. A strong break below 74 will pave the way for 74.50 initially. It will also keep the rupee under pressure to revisit 75 and 76 levels eventually for which the sustainability below 74 will have to be watched. On the other hand, if rupee manages to sustain above 74, it can recover towards 73.60-73.50 and even 73.20 going forward. The price action around 74 will need a close watch on Monday.

The writer is a Chief Research Analyst at Kshitij Consultancy Services