Rupee witnessed volatile movement over the past week though it closed almost unchanged over its closing level a week ago. The resolution of the Cyprus issue and Government of India easing investment rules for foreign funds purchasing government and corporate bonds helped bolster the rupee. But concerns regarding political uncertainty caused by DMK’s pull-out from the ruling coalition dampened investors sentiment in the currency.

Overseas funds have bought a net of $1.7 billion of local stocks this month through March 22. This is much lower compared with purchases of more than $4 billion in each of the previous three months thus raising doubts regarding financing of current account deficit through foreign portfolio flows. Bank of America Merrill lynch too has predicted that current account deficit would widen to $31 billion in the fourth quarter.

One-month implied volatility of the rupee, a measure of expected moves in exchange rates that is used to price options, declined by 108 basis points to 8 for the week. Three-month onshore rupee forwards were at 55.47 a dollar and offshore non-deliverable contracts were at 55.39 a dollar on Tuesday against 55.46 and 55.41, respectively, last week.

Euro was flat for the week and was trading around 1.28 per dollar. It rose to an intraweek high of 1.30 on the back of agreement of the Cyprus bailout plan which diminishes the probability of the country’s default and disorderly exit from the Euro Zone. The momentum was short lived as Euro group finance ministers said that similar agreements will be done with other troubled states of Euro region. Weak purchasing manager index (PMI) figures from the Euro Zone nation also spooked investors.

Technical analysis

The long-term trend in the rupee is down since the July 2011 peak of 43.8. One leg of this down-move was completed at the trough formed at 57.3 in June 2012. The dollar rupee currency pair is correcting this down-move since then.

Key long-term resistance for the currency pair is at 52.2. The long-term trend remains down as long as the currency trades below this level. Continued movement in the band between 52 and 57 will keep open the risk of the currency depreciating below 57 in the months ahead.

Long term hurdles above 52 are at 50.5 and 49.

The short-term trend in the dollar rupee currency pair is also sideways in the range between 53 and 56. The currency pair could continue moving in this band over the short-term.

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