Rupee testing short-term support

It was pandemonium in financial markets on Monday as stock prices plunged into a deep abyss and gold rose to stratospheric heights. Forex markets were, however, unusually stoic in their reaction to the S&P downgrade of US long-term debt. Dollar remained quite resilient and the rupee headed lower to 45.4 instead of rallying. Movement of stocks and FII action appears to have a greater influence on the rupee. The sun began shining in the global financial markets once more on Wednesday after the Federal Reserve pledged to keep interest rates at record low for a couple of years more. Equity markets headed higher, while commodity prices and dollar weakened. The dollar index retreated below 74. Immediate supports are at 73.4 and 72.7 while short-term resistances are at 75.4 and 76.7. That the index is close to its 50-year low of 70.7 formed in March 2008 could translate in to limited down-side from current level.

Dollar-rupee outlook : The rupee moved past the support at 44.8 on Monday to record the low of 45.4 on Tuesday. The currency has strong support at this level that is also the trough formed on May 25. Since the currency is reversing higher from this support, it can now rally to 44.8 or 44.4 over the upcoming sessions. If the rally halts at the first resistance, it will have negative connotation for the medium-term. Key medium-term supports for the rupee are at 45.4 and 46.3. We will retain a positive medium-term outlook for the currency as long as it trades above 46.3. Our long-term view for the currency remains positive. However, as discussed earlier, the area around 44 is a very significant long-term resistance and the rupee might not be able to cross this hurdle just yet.

USD-INR futures : Put up a stellar show, moving way above our farthest resistance at 44.84 to rally to 45.56 on Tuesday. The contract however has strong resistance at 45.5 that occurs at 38.2 per cent retracement of the decline from May 2010 peak. Reversal from here will drag the contract lower to 44.9, 44.7 or 44.5. Fresh shorts are advised only on close below the first support. Inability to breach this level (44.9) will result in the contract vacillating between 44.9 and 45.5 for few more sessions.

EUR-INR futures : Moved sharply higher after the US downgrade to record the high of 65 on Wednesday. Key short-term resistance is around 65 and fresh long positions are recommended only on close above this level. Subsequent targets are 65.6, 65.9 and 66.7. The contract will receive supports from 64.2, 64 and 63.7 in the days ahead.

GBP-INR futures : Moved far above our outer target to achieve the high of 74.3 on Tuesday. The contract faces strong resistance at 74.5 and fresh longs are recommended only on a close above this level. But inability to move above this level in the upcoming sessions can drag the contract down to 73, 72.6 or 72.2.

JPY-INR futures : Was extremely volatile over the past week, first declining to the low of 55.8 and then zooming well beyond our medium-term target to the peak of 59.1 on Wednesday. Next target for the contract is 61. Investors can hold the contract with stop at 57.8. Subsequent supports are at 57 and 55.7.