Rupee halts at a key resistance

Reversal in dollar stops rupee rally

It was another volatile week for the rupee. The currency gained momentum after breaking above the crucial resistance level of 64 on Wednesday.

The 25-basis point (bps) interest rate cut from the Reserve Bank of India last week pushed the rupee above the critical barrier of 64 which has been capping the upside for the currency for the last four months. The rupee touched a high of 63.57 and reversed slightly lowerto close at 63.81 on Monday.

Short squeeze

The dollar, which was under pressure over the last few weeks, got a breather from the jobs data on Friday. The US added 209,000 to its July non-farm payroll, beating the market expectation of an increase of 183,000.

The unemployment rate fell to 4.3 per cent in July from 4.4 per cent a month earlier. The positive job numbers triggered a sharp short-covering rally in the dollar index from a low of 92.50 to a high of 93.75.

The index has come-off slightly from this high and is currently trading at 93.40. Support for the index is in the 93.3-93 region. Whether it manages to sustain above this support or not will decide the next move. As long as it trades above 93, a rise to 94 looks likely.

Further rally past 94 will ease the downside pressure and take the index higher to 94.5 — a key short-term resistance which can cap the upside.

On the other hand, if the dollar index breaks below 93 decisively, it can come under pressure once again and can fall to 92 levels thereafter. The US inflation data is due for release this Friday.

A weak inflation number would bring back the pressure on the dollar and will increase the likelihood of the index falling to 92 levels.

The 50 per cent Fibonacci retracement resistance at 63.59 has halted the sharp up-move in the rupee after it broke above 64.

Technically, the downward reversal on Monday is significant. Further strength in the rupee is possible only if it surpasses the immediate hurdle at 63.59. As long as the rupee stays below 63.59, a fall to 64 or even 64.20 is possible in the short-term.

Broadly, one can expect the rupee to remain range bound between 63.59 and 64.20 in the coming days. A breakout on either side of this range will decide the next move for it. If the rupee manages to break above 63.59, it can strengthen further to 63.35 or even 63 thereafter.

On the other hand, if it breaks below 64.20, it can weaken to 64.50 or even lower levels thereafter.

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