The rupee is finally getting a breather. After getting knocked down badly since the beginning of 2018, the currency is getting some relief as the market approaches the year end.

The currency tumbled to its all-time low of 74.48 in early October and has recovered sharply from there over the last few weeks. The rupee has reversed higher by about 4 per cent from the record lows and is currently trading at 71.65.

Dragging factors

A strong surge in crude oil prices and foreign portfolio investors (FPI) pulling out money from the Indian debt segment have been keeping the rupee under pressure since the beginning of this year. Crude oil (WTI) prices surged from around $58 per barrel in February to $77 in October increasing the concerns of India’s trade and current account deficit widening. FPIs have pulled out $7.7 billion from debt and $5.2 billion from equities this year.

Apart from these two factors, the strength in the US dollar and the rate hikes from the US Federal Reserve have also been weighing on the rupee.

The turnaround

However, things have turned around over the last few weeks. A sharp downward reversal in crude oil prices have helped the rupee recover from record lows. Crude oil (WTI) prices have been falling sharply over the last six consecutive weeks. WTI crude has plummeted about 28 per cent, wiping out all the gains made through this year, from around $77 in October to test $55 per barrel last week. The prices have bounced from there and are currently trading at $57. This has helped the rupee recover from its all-time low of 74.48 to the current levels of 71.65.

What next?

So, how far can the rupee strengthen against the US dollar? A study on the rupee over the last 10 years indicates that the current recovery can extend further in the coming weeks.

A Fibonacci retracement study on five different legs of the movements (from a high to new low) in the rupee from 2008 shows a specific trend. The rupee has always retraced to a level in between the 50 per cent and the 61.8 per cent Fibonacci retracement support. For instance, rupee fell from 43.85 (June 2011) to 54.3 (December 2011). Thereafter, the currency recovered to 48.6 (February 2012) – the level which falls in between 49.08 (the 50 per cent Fibonacci retracement level) and 47.84 (61.8 per cent retracement level).

Similarly, the rupee had recovered from 51.38 (October 2012) to 68.85 (August 2013) up to 58.33 – a level close to the 61.8 per cent retracement support level of 58.05.

If this trend continues, then there is a strong likelihood of the rupee strengthening towards 69 and 68 against the US dollar in the coming weeks. The levels of 69 and 67.75 are the 50 per cent and 61.8 per cent retracement supports of the recent fall from 63.59 (January 2018) to 74.48 (October 2018).

A near-term resistance is in the 71.20-71.10 region. An intermediate pull-back move to 72 or even 72.5 cannot be ruled out before the rupee heads towards 70 and 69. On the charts, the level of 69 is a strong long-term resistance that can cap the upside of the current leg of upmove in the rupee.

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