Gains await rupee after holiday break

Expect a leg-up after weak US job numbers

The curtailed two-day trading week in the Indian currency market ended on a calm note. The rupee opened weak at 62.59 and fell to a low of 62.69 on Monday. Then it gained some ground to close at 62.4975 on Tuesday, down 0.13 per cent. The currency market was closed from Wednesday onwards due to public holidays.



The rupee has ended the first quarter of this year higher by 0.87 per cent against the dollar. The Indian rupee could get a boost as it opens on Monday after its long holiday.



The boost could come from bad US jobs data that was unveiled on Friday. This has again raised the bets in favour of the Fed remaining ‘patient’ on rate hikes. US non-farm payroll employment in March increased by just 1,26,000 as against market expectations for a 2,51,000 increase. January and February numbers were also revised lower, adding to bad news. A sizeable gap-up is possible as the Indian rupee opens today.



Policy announcements



Amid flagging export numbers, India’s much awaited Foreign Trade Policy (FTP) for 2015-2020 was finally unveiled last week after a delay of about a year. A target of $900 billion has been set for exports from about $465 billion now. The ability to achieve this export target will hold the key to the rupee’s fundamentals over the medium term as it will have a big bearing on India’s CAD numbers. But not all are optimistic. Rafeeque Ahmed, Chairman, Council for Leather Exports, points out that simplifying the procedures is not the key, what the export sector lacks is the marketing support.



The RBI last week increased the overall exposure limits for both domestic as well as Foreign Portfolio Investors trading in Exchange Traded Currency Derivatives (ETCD). Both can now take positions (long or short) up to $15 million (up from $10 million) in the USD-INR pair. In the other three pairs (EUR-INR, JPY-INR and GBP-INR) combined they can take positions up to $5 million. This could help push up volumes in currency derivatives.



Importers have also been allowed to hedge up to 100 per cent of their eligible limit through the ETCD. Earlier they were permitted to hedge only up to 50 per cent of their eligible limit. While the currency market frets about another bout of volatility on the back of US interest rate hike, this move from the RBI could help firms with large exposures hedge through the transparent exchange platform.



Data releases



Fiscal deficit and the Manufacturing Purchasing Managers Index (PMI) were the two important data releases last week. India’s fiscal deficit, for the April-February period, at ₹6.02 lakh crore, exceeded the government’s target of ₹5.13 lakh crore by over 17 per cent.



However, the government is confident that the early upfront payment by telecom companies for the spectrum auction could help to meet its deficit target of 4.1 per cent of GDP.



HSBC’s Manufacturing PMI has risen to 52.1 in March from 51.2 the month earlier. A strong rise in new orders has helped in pushing the PMI higher.



However, the major event of the week is going to be the RBI’s first bi-monthly policy meeting of this fiscal on Tuesday. After a surprise 50 basis points rate cut since January, markets expect the RBI to keep the rates unchanged in this meeting. So no cues for the currency expected from this event.



Dollar outlook



The dollar index (96.74) failed sustain the break above 98 last week . The outlook is bearish with key resistances at 97.5 and 98. A fall to 96, 95.5 and even 95 is possible. The US Federal Reserve’s minutes of its March meeting release on Wednesday is the only major event scheduled for this week from the US. So last week’s weak job numbers could continue to weigh on the dollar.



The dollar is looking weak against the Asian currencies as well. The Bloomberg JP Morgan Asia Dollar Index (ADXY), currently at 112.65 is bullish.



An inverted head and shoulder reversal pattern is visible on the daily chart. The neckline support of this pattern is at 112.35. A rise to 113 and 114 — the target level of the pattern looks possibleafter Friday’s bad US jobs data. A bullish ADXY is a positive for the Indian rupee .



Rupee outlook



With just only two trading days last week, nothing much has changed on the charts. Indeed, the bad US data on Friday has reinforced the short-term bullish outlook on the rupee.



A gap-up opening is expected today and the rupee can strengthen to 61.95, which is a key resistance level. A breach of this hurdle can take the currency further higher to 61.75 in the short term. This 61.75 is a key short-term trend line resistance that could halt the rally in the rupee.



Further weakness in the rupee is expected only if it declines below 62.8. In such a scenario, a fall to 63.1 and 63.25 is possible in the short term.



However, the strength in rupee could be limited over a medium-term time frame. There is a strong trend resistance at 61.1, a break of which may not be very easy. A reversal from here can see the rupee weakening to 63 and even 64 levels once again in the medium term.



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