Currency Call. Rupee pulls back, but will it last?

The Indian rupee is managing to keep its head above water. The currency opened the week at 63.47 on Monday and was threatening to fall below 64, as it hit 63.89 by Wednesday. But global weakness in the US dollar helped the rupee reverse higher to close the week flat at 63.52 on Friday.

Though the short-term view now appears bullish for the rupee on the charts, the sharp sell-off in major currencies, such as the euro, British pound and Japanese yen in the US on Friday could put the rupee under renewed pressure this week.

Core Consumer Price Index (CPI) inflation in the US rose 0.3 per cent in April, higher than the market expectation of a 0.2 per cent rise. The dollar index surged about 1 per cent on Friday as a higher CPI kept the market expectation intact for a rate hike this year. Since the US CPI data was released after the Indian markets had closed, the rupee may only react to this data today.

Foreign portfolio investors’ action was muted last week. They bought a mere $44.32 million in the debt and $278.33 million in the equity segments.

Money flow into the Indian debt segment will need a close watch now. The inflow into bonds has been abating consistently since January. If the same trend continues, it will not be a surprise to see FPIs turning net sellers of Indian debt in May.

If this happens, it will reverse the 12-month trend (since May 2014) of FPIs being net buyers of debt. FPIs have sold around $1.4 billion so far this month.

If the sell-off intensifies further, it could put further pressure on the currency.

After five weeks of consecutive decline, the dollar index (96.14) found some respite last week. The index surged over 3 per cent, thanks to strong economic data releases which helped halt the fall.

The initial trigger came from the housing starts number released last Tuesday. US housing starts surged 20.2 per cent in April to 1.135 million units from 0.944 units in March. Resumption of construction activity suggests that the US economy could be on a strong wicket, easing the Fed’s concerns on a sluggish housing sector. Further fuel was added to the rally in the dollar index from the strong CPI data on Friday.

Both these data releases last week have increased the possibility of a rate hike this year. The market would be keen to assess new home sales numbers on Tuesday, followed by preliminary first quarter GDP data on Friday. On the domestic front, the fiscal deficit and the GDP data releases are due on Friday.

The immediate outlook for the dollar index is bullish with strong support at 95. The index can rise to test its next important resistance at 97. A strong break above this hurdle will see the index rising further to 97.5 and 98 this week. But a failure to break above 97 can reverse the dollar index lower to 96, or even to 95 once again.

The bullish view for the euro (1.10) and the British pound (1.5480) mentioned in this column last week did not materialise as both the currencies tumbled against the greenback. Both fell over 1 per cent last week.

The euro is poised at a crucial support level of 1.10. A break below this level could drag it further lower to 1.09 and 1.08 this week. Key resistance is at 1.12 and only a strong break above this level will ease the downside pressure for the currency.

The British pound can fall to 1.53 if it declines below the immediate support at 1.54.

The Japanese yen (121.4) could head further lower to test its long-term support at 122.35.

Further fall in these three currencies could aid the dollar index to move higher. This, in turn, could put pressure on the rupee.

The reversal from the low of 63.89 last week is a positive for the rupee. This confirms the double bottom reversal pattern on the daily chart which turns the short-term outlook bullish.

But if the rupee reacts too negatively, in line with other currencies, to the US CPI data, it could fall back to test its important support at 63.88 in the initial part of the week.

A further break below this level will put pressure on the currency and drag it lower to 64.25.

On the other hand, if the reversal holds, then the rupee strengthening to test the next resistance at 63.25 cannot be ruled out this week.

A break above this level can take it further higher to 63 in the short term.

Strong resistance for the rupee is in the 63-62.7 zone and as such the short-term strength in the rupee could be limited to this support zone.

But inability to breach 63.25 and a reversal thereafter could see the rupee losing ground and falling back to 63.5 and 63.7. We will have to wait and see whether the rupee is going to dance to the tunes of the data release or the charts.

Whatever the outlook for the rupee in the short term, the medium-term view remains bearish for now.

A strong resistance is in place at 62 and the possibility of the rupee strengthening beyond this level appears less likely.

A fall to 64.83 — the 61.8 per cent Fibonacci retracement and an important medium-term support level, is still a possibility.

If this support manages to arrest a further fall, then the rupee could get a breather and strengthen to 63.5 and 63 thereafter.

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