Currency Call. Rupee remains stable

The rupee is stuck in a sideways range between 63.85 and 64.33 for more than a month. Within this broad range, the currency fell below 64 in the past week and closed at 64.14 on Monday, down 0.3 per cent for the week.

Surprisingly, while the dollar index has tumbled about 8 per cent from around 100 in April to the current levels of 92, the rupee has remained stable, broadly between 63.5 and 65.

Within this broad range, it has been trading around 64 for about a month now. This leaves open the the danger of the rupee weakening sharply going forward if the dollar index reverses higher and gains bullish momentum.

Although there is no immediate possible trigger for the dollar index to reverse higher, a sudden trend reversal in the greenback remains a threat for the rupee.

The balance of payment data was released last week. India’s current account deficit (CAD) widened to $14.34 billion in the first quarter of this fiscal from $3.45 billion in the previous quarter.

The CAD was just $0.30 billion for the same period in the previous year. The trade deficit increasing to $41.22 billion in this quarter dragged the CAD to its highest level since June 2013.

The CAD, standing at a four-year high, is a concern for the rupee from a long-term perspective. This may restrict the strength in the rupee in the coming weeks. It also increases the possibility of the currency weakening going forward.

The Bank of England (BoE) last week had signalled an increased prospect of a rate hike.

This follows the European Central Bank’s (ECB) announcement in the week earlier to decide on its stimulus tapering in October.

As the global majors are gearing up to join the US on policy tightening, the US Federal Reserve’s meet this week on Wednesday will be an important event to watch. Following the ECB and the BoE, it is the US Fed’s turn this week to keep the currency market volatile.

Data release last week showed that the US inflation (CPI) rose to 1.9 per cent in August from 1.7 per cent in July. The inflation inching higher has increased the hopes in the market of another rate hike from the Fed this week.

Apart from the interest rate decision, the market will be keen to know more on the Fed’s balance-sheet unwinding plan.

The dollar index has reversed lower after touching a high of 92.66 in the past week. It is currently trading at 91.90. The outcome of the Fed meeting this week may give a cue on the next possible move for the index.

However, on the charts, the short-term outlook remains negative as long as the index trades below the resistance at 92.60. Support is at 91. A strong break below it can drag the index lower to 90.3 in the coming weeks.

But, if the index manages to sustain above 91, a sideways move between 91 and 92.6 is possible for some time.

Inability to break above 64 and an immediate downward reversal after testing this support on Monday leaves a negative bias for the rupee.

A decisive close below 64.20 will increase the downside pressure. In such a scenario, the possibility of the rupee falling to 64.5 will increase. Further break below 64.5 can drag the currency lower to 64.7.

The rupee can gain positive momentum only if it breaks the psychological barrier of 64. Such a break will ease the downside pressure and take it higher to 63.8. But the price action on Monday leaves less possibility for the currency to break above 64 in the near-term.

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