Re knocking at medium-term support

The turbulence in financial markets is showing no sign of abating. Things took a turn for the worse after US jobs data indicated zero addition to employment in the month of August. Further, concerns about European banks revived on Monday to pull the euro lower even as the dollar and gold surged. The rupee strengthened to 45.7 against the dollar following the rally in equity prices last week. But this rally was stalled by another round of sell-off in stock prices since Monday. Dollar demand from importers and hardening dollar also contributed to the rupee weakness.

Dollar-rupee outlook : Two holidays over the past week resulted in the rupee moving in a narrow range between 45.75 and 46.15. As explained earlier, the currency pair has strong support around 46.3, that is, 61.8 per cent (Fibonacci ratio) retracement of the rally from 47.7 to 44. This level is also at the lower end of the trading band that is enclosing the currency pair since May 2010. The medium-term trend will stay sideways as long as the currency pair trades above 46.3. Decline below this level will make the outlook negative paving the way for further decline to the long-term support zone between 47.1 and 47.7. The long-term trend in the currency is positive since March 2009 peak of 52.1. Strong weekly close below 47.1 is required to indicate a propensity to decline further to 48 or 49.

USD-INR futures : Did not breach our short-term stop-loss at 45.8 but the contract could not make any progress higher either and remained within a narrow range between 45.88 and 46.25. We stay with the view that traders can hold their long positions with stop at 45.8. Targets on a break above 46.2 are 46.48 and then 46.87. But traders need to bear in mind that the contract is at key medium-term resistance level. It is possible that the contract reverses from 46.2 again to decline to 45.3 or even lower.

EUR-INR futures : These contracts moved in line with our expectation to decline below our first downward support at 65.4 to record the low of 64.9 on Tuesday. The contract is attempting to rebound from current levels but it will face resistances at 66.1 and then 66.9. Supports for the days ahead would be at 64.5 and then at 63.9.

GBP-INR futures : These futures breached the short-term support at 74.8 on Friday to record the trough at 74. Traders with greater penchant for risk can hold the contracts with stop at 74. Rebound from these levels can take the contract to 74.77 or 75.25. Supports below 74 are at 73.4 and 72.8.

JPY-INR futures : The sideways movement between 59.4 and 69.2 continued in these contracts. Traders can continue to hold the contract with stop at 59.6. Medium-term targets stay at 61 and 66.