Global jitters drag rupee to record lows

The strong fall below 69 paves the way for the next targets of 70.3 and 72

Increasing risk aversion in the market dragged the Indian rupee to record lows on Monday. The currency opened with a wide gap-down at 69.48 and tumbled to a new all-time low of 69.61. The sharp fall on Monday has ended the Indian rupee’s prolonged sideways consolidation between 68.25 and 69.10. The currency has been stuck in this range for about six weeks.

Turkey the trigger

The trigger for the breakout came from Turkey. The Turkish lira has been on free fall since Friday. Its currency had tumbled about 20 per cent intraday on Friday after the US President Donald Trump announced that the tariffs on imports of aluminium and steel from Turkey will be doubled to 20 per cent and 50 per cent respectively. This has added further pressure on the currency which has already been falling on the back of weak economic factors. The Turkish lira tumbled to a record low of 7.23 against the US dollar on Monday and has recovered slightly from there to the current levels of 6.87.

The sell-off has spread to all other emerging market currencies as well. The Brazilian Real, Mexican Peso, Russian Rouble and South African Rand are all down between 1 per cent and 5 per cent since Thursday.

Strong dollar

The US dollar index has surged 1.5 per cent from around 95 in the past week to 96.4 now. A sharp fall in the euro (major component of the dollar index) has taken the dollar index sharply higher. The euro has tumbled on concerns of the countries forming part of the European Union having exposures with Turkey. The euro has tumbled 1.8 per cent from around 1.6 to the current levels of 1.1385. It is likely to test 1.13 in the near term. A strong break below 1.13 can drag it to 1.12 or even 1.11 in the coming weeks.

A weak euro is likely to keep the dollar index strong. The dollar index can test 97.2 in the short term. A strong break above 97.2 will pave the way for the next target of 97.8 and 98. This in turn may keep the rupee under pressure.

What next for rupee?

The outlook for the Indian rupee remains negative. The level of 69.20 and 68.90 are the key near-term resistances which can cap the upside in the rupee. A fall to test the next supports at 70 and 70.3 is possible in the coming days. If the rupee manages to recover from any of these supports on the back of an intervention from the Reserve Bank of India, an intermediate upmove to 69.2 or 68.9 is possible. In such a scenario, a range-bound move between 68.9 and 70.3 is possible for some time.

However, an eventual break below 70.3 will bring renewed pressure on the currency. Such a break will increase the likelihood of the currency tumbling to 72 over the medium term.

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