News Analysis

Short-term view remains positive for rupee

Gurumurthy K BL Research Bureau | Updated on January 07, 2019 Published on January 07, 2019

Negative bias in the dollar index may help the currency, but recovering oil price needs to be watched

The Indian rupee has begun the New Year on a volatile note. The currency fell to a low of 70.52 on Thursday and was threatening to revisit 71 levels. However, the currency managed to recover sharply from the low and made a high of 69.24 before closing at 69.68 on Monday, up 0.12 per cent for the week.

The US dollar index coming off after testing 97 in the past week helped the Indian rupee recover. The dollar index tested 97 on Wednesday and has reversed lower. It is currently trading near 96.

Dollar turns negative

The US dollar index has been stuck in a sideways range between 96 and 97.7 since November. Within this range, the bias is turning negative. The price action on the daily chart indicates the formation of a rounding top. This is a bearish pattern indicating that the upmove is coming to an end. It also increases the possibility of the index breaking the range below 96 in the coming days.

Surprisingly, the dollar index has failed to gain strength even after the strong jobs data released on Friday. The US non-farm payroll surged by 312,000, beating the market expectation for an increase of 176,000. The dollar index spiked from 96 to 96.6 after the data release but failed to sustain higher.

The region between 96 and 95.8 is a crucial support to watch. A strong break below it will drag the index lower to 95 or even 94.75 in the short term. Such a fall in the dollar index can see the rupee strengthening further against the greenback.

Crude oil prices will need a close watch. WTI Crude Oil prices have surged over 7 per cent in the past week. It is currently trading at $48.8 per barrel. Support for WTI Crude is at $47.50. As long as it remains above this support, an upmove to $52 and $54 is likely in the coming weeks. Such a rally will bring pressure on the rupee and cap its strength.

Rupee outlook

The short-term outlook remains positive for the Indian rupee. Indicators on the charts are also positive. The 55-day moving average has crossed over the 100-day moving average. This is a positive signal, indicating that the downside could be limited over the short term. Immediate support is in the 69.9-70 region. Next strong short-term support is at 70.5. The currency will come under pressure only if it declines decisively below 70.5. In that case, the rupee can depreciate towards 71 and 71.5 thereafter. But such a fall looks less likely at the moment.

The rupee is likely to test the crucial resistance level of 68.9 in the near term. Inability to breach 68.9 can trigger a pull-back move to 69.5 and 70 again.

But a strong break above 68.9 will increase the likelihood of the rupee strengthening further towards 68.6 thereafter. It will also leave the possibility high of the rupee testing 68 against the US dollar over the medium term.

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