Interesting times for the rupee

Quite a few central bank meetings, including of the RBI, make for a busy week



The Indian rupee has been stuck in a narrow range between 63.3 and 64.3 for four consecutive weeks. Last week, it weakened to 64.16 by Wednesday after opening at 63.62. Strong housing data from the US on Tuesday added to the dollar’s strength and took the dollar index higher, thereby adding pressure to the rupee in the initial part of the week.

However, the rupee managed to gain ground from its low to touch 63.69 before closing at 63.825 on Friday, down 0.48 per cent for the week.

Action-packed

The currency market could turn more volatile this week as it is packed with many market-moving events, central bank meetings and data releases, both domestic and global. On the domestic front, this starts with HSBC’s Manufacturing Purchasing Managers’ Index (PMI) data release today (Monday). This will be followed by the much-awaited Reserve Bank of India monetary policy meeting on Tuesday. With easing inflation, expectations have built up in the market for at least a 25-basis-point rate cut from the RBI .

Globally, the European Central Bank meeting is on Wednesday. While nothing much is expected from this meeting, any surprise comments on its quantitative easing in the press conference could move the dollar accordingly. Two major events are scheduled for the end of the week on Friday. These are the US non-farm payroll and employment data releases and the Organization of Petroleum Exporting Countries (OPEC) meeting.

Strong US job numbers could see the dollar surging as it would strengthen the case for a rate hike this year. This will be negative for the rupee. OPEC is not expected to cut its oil production targets. Though this would be negative for oil prices, this is already priced into the market. Therefore, it may not have a major impact in the ongoing rally in crude price.

Any further rise in oil prices could turn the rupee weaker.

Dollar outlook

The dollar index (96.91) surged about 2 per cent intra-week to record a high of 97.77. The immediate resistance is at 97.2. Inability to surpass this hurdle could drag the index lower to 96 and 95.8. Only a strong break above 97.2 will increase the momentum and take the index higher to 98 and 98.5 levels.

Among major currencies, the Japanese yen (124) witnessed a major breakout last week. It has declined below a key long-term trendline support at 122.5. Additional supports are present at 125 and a break below that level could drag the yen lower to 130 levels in the coming weeks, against the greenback. A fall in the yen could help limit the downside for the dollar index.

Rupee outlook

The rupee’s range-bound movement between 63.3 and 64.3 remains intact. A breakout on either side of this range will decide the next leg of the move.

With a series of central bank meetings and other important events lined up for this week, there may be sufficient triggers for such a breakout. On the daily chart, a triangle formation is visible with supports at 64.2 and 64.3. A decisive daily close below 64.2 could be cue for the rupee to break below 64.3. Such a break can then drag it lower to 64.83 — a key Fibonacci retracement level. On the upside, key resistance for the rupee is at 63.5, which needs to be surpassed for it to gain strength. The next targets will be 63.3 and 63.

The medium-term view for the rupee remains bearish with resistances at 62.5 and 62. Key support is at 64.83 and a break below it can take the rupee lower to 66 and 67 levels.

A head and shoulder reversal pattern, being flagged in this column over the last few weeks, still remains a risk. The monthly line chart is sending out initial signals confirming this pattern.

A strong weekly close below 64.3 would confirm the pattern from the weekly candlestick chart.

Any such move will have targets at 67.5 based on the monthly line chart and 69.5 based on the weekly candlestick chart.

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