Currency outlook: Rupee spins out of control

It has been a spiral down a bottomless pit for the rupee over the past week. It closed below its previous lifetime low at 54.3 on May 17, and is currently trading over 3 per cent below this level. Foreign portfolio flows turning negative over the past week and demand for dollars from importers could be applying downward pressure on the Indian currency.

Rise in global risk aversion due to the ongoing politico-economic crisis in Greece and the fear that Greece might have to exit the Euro zone are causing the dollar to strengthen against other currencies. Weak economic data emanating out of the US and Japan further roiled sentiment in the global forex market. The dollar index has moved to the resistance at 81.8. Any further strength will mean that the greenback can move higher to 84 in the upcoming weeks.

Euro-rupee outlook : The Euro is hovering close to the low of 1.26 recorded in January. If this level is breached, next halt will be at 1.20 that occurs at 50 per cent retracement of the up-move from 2000 low. The rupee has also depreciated 12 per cent against the Euro since this February. The Euro-rupee pair is currently close to its lifetime low at 71.9 recorded last November. Firm close below 70 will take the Euro-rupee rate to 74.

Dollar-rupee outlook : The sharp down-move in the rupee over the past week makes it obvious that the third leg of the down-move from July 2011 peak of 43.8 is currently in progress. Extrapolation of this move gave us the target at 55.1 and then 59.1. Since the currency is firmly past 55, the next medium-term target is 59.1.

If we expand the picture and consider the target of the third wave from 2008 peak, we arrive at the target of 51.8 and 56.7. In other words, immediate target for the rupee is 56.7. If this level is breached, the decline can extend to 59.1. Close above 53.3 is needed to make the medium-term view positive.

USD-INR futures : This contract went on to the high of 56.27 on Wednesday, well above our target of 55. Short-term traders can hold their long positions with stop at 54.9. Subsequent supports are at 54.5 and 54.2.

Continued rally can take the rupee higher to 56.4 and 58.4.