Rupee hovers above a key support

A break below 64 can lead to renewed weakness in the currency

It was a volatile week for the rupee. The currency witnessed a sharp fall last Tuesday and touched a low of 64.11.

However, this sharp down-move was short-lived as the rupee managed to recoup most of the loss thereafter. It rose to a high of 63.63 on Friday and fell back again on Monday to test 64 before closing at 63.87, down 0.6 per cent for the week.

Deficit concerns

India’s trade deficit widening to a three-year high was a major trigger in dragging the rupee lower towards 64.11 initially last week. The weak data also kept the currency under pressure all through the week by limiting the upside.

Data release from the Commerce Ministry showed that the country’s exports in December 2017 increased 12.36 per cent (year-on-year) and the imports surged 21.12 per cent over the same period.

A sharp rise in gold and crude oil imports pushed the trade deficit to a three-year high of $14.88 billion. The deficit was $10.55 billion a year ago in December 2016 and was at $13.83 billion in November 2017.

Crude oil prices are expected to remain elevated and increases the possibility of the deficit widening in the coming months. This could restrict the strengthening of the rupee from a long-term perspective and keep the currency under pressure.

Dollar outlook

Uncertainty on whether the US government will run into a shutdown kept the dollar mixed all through last week. The dollar index was stuck in a narrow range between 90 and 91 over the last one week. The index had not reacted much on Monday after the government shutdown came into effect from Saturday.

The immediate outlook for the index is unclear. A crucial support for the index is at 89.80. Whether the index manages to reverse higher from there or not will be the key in deciding the next trend. A bounce from this support can ease the downside pressure and trigger a relief rally to 91 or even 92. But a strong break below 89.9 will increase the likelihood of the index tumbling to 88. Such a fall in the dollar index may aid the rupee to strengthen further.

Rupee outlook

As long as the rupee manages to sustain above 64, the short-term outlook will remain bullish. The currency will come under pressure only on a strong break below 64. Such a break can drag the rupee lower to 64.5 and 64.6 over the short term. Having said that, while the rupee remains above 64, it can move up to test the key resistance levels of 63.25 and 63. Inability to break further above 63 can keep the rupee range-bound, between 63 and 64, for some time.

But if the rupee manages to surpass the hurdle at 63, it can strengthen further to 62.8 and 62.7. As mentioned last week, this move towards 62.8 or 62.7 is possible only if the dollar index breaks below 89.8.

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