Rupee struggles to sustain at higher levels

The threat of the rupee weakening to 66 eased in the past week. The currency managed to sustain above the support level of 65.5 and strengthened sharply against the US dollar last week.

Thanks to the ratings upgrade from Moody’s, the rupee opened with a wide gap-up and rose sharply higher, breaking above 65 to an intra-week high of 64.62 on Friday.

Moody’s upgraded India’s rating to Baa2 from Baa3.

However, the impact of this ratings upgrade on the currency was short-lived as the rupee reversed lower immediately from the high of 64.62, giving back most of the gains and tested 65 levels again. This reflects the inherent weakness in the rupee.

It also suggests that the concerns on recent weak macroeconomic data releases like the widening trade deficit is weighing more on the rupee.

The currency hit a low of 65.12 before closing at 65.09 on Monday, up 0.51 per cent for the week.

Weakness in the US dollar also supported the rupee, helping it recover in the initial part of the week from around 65.5 levels. The dollar index (93.75) declined below the key support level of 93.85 to make a low of 93.40.

Though it managed to bounce back from this low, the index is not gaining momentum to rise past 94 again.

After testing this psychological resistance level of 94 several times since Thursday, the dollar index has come off again.

It is likely to dip and test the next support level of 93.30 in the near term.

A strong break below this support can take the index lower to 93 and 92.7 in the coming days. Such a fall may limit the downside in the rupee in the near term.

On the other hand, if the dollar index manages to reverse higher from 93.3, a rise to 94 can be seen again.

A range-bound move between 93.3 and 94 is possible for some time in that case.

A strong break and a decisive close above 94 is needed for the index to gain fresh momentum. Such a break will ease the downside pressure and take the index higher to 94.5 and 95 thereafter.

The sharp and immediate pull-back from the high of 64.62 last week indicates lack of fresh buyers for the rupee in the market. Immediate resistance is at 64.85.

As long as the rupee trades below this hurdle, a fall to revisit 65.50-65.55 levels is possible in the coming days.

A strong break and a decisive close below 65.55 will increase the likelihood of the fall extending to 65.8 or even 66 levels thereafter.

On the other hand, if the rupee manages to breach the immediate resistance at 64.85 in the coming days, it can strengthen to 64.60 again.

Further break above 64.6 will see the currency moving higher to 64.5 or 64.4 thereafter.

A dluster of resistances are present between 64.6 and 64.40. So, the pace of the upmove beyond 64.6, if seen, could be slow.

Also, the rupee’s strength is expected to be capped to 64.4 as a break above 64.4 looks unlikely at the moment.