CURRENCY CALL. Limited scope for rupee strengthening further

The threat of the rupee breaking below 65 has eased as the currency managed to recover in the past week.

The rupee tested the support at 64.90 on June 3 and reversed higher from there to touch 64.48 before closing at 64.53 on Monday. The recovery in the Indian benchmark indices aided the rupee, as the dollar index remained stable through the week.

The dollar index has been hovering around 96 over the last one week. It is currently trading at 96.15. Support for the index is at 95.5 and resistance is at 96.5. A breakout on either side of 95.5 or 96.5 is needed to get a clear direction on the next move.

If the dollar index manages to sustain above 96 and breaks above 96.5 in the coming days, the downside pressure may ease. It will then pave the way for the index to target 97 or even 97.5 thereafter.

Such a rise in the dollar index may limit the upside in the rupee and drag it lower towards 65 in the coming days. On the other hand, if the dollar index declines below 95.5, it can fall to 95.3 or 95 in the coming week.

On the domestic front, key macroeconomic data releases are due for release this week. The Index of Industrial Production (IIP) and the Consumer Price Index (CPI) inflation numbers will be released on Wednesday (July 12).

This will be followed by the Wholesale Price Index (WPI) inflation data on Friday. The country’s trade data is also due for release during the week. Markets could remain volatile on the back of these data releases this week.

The trendline support at 64.90 has held very well for the rupee and the currency recovered in the past week after testing this level. Immediate resistance is at 64.40 which can be tested in the near term. If the rupee manages to breach above this hurdle, it can strengthen further to 64.20 or even 64 in the coming days.

On the other hand, inability to break above 64.4 and a downward reversal from there will increase the likelihood of the currency weakening to 64.80 and 64.90 levels. A strong break and a decisive close below 64.90 will then increase the possibility of the rupee weakening below 65.

A strong break below 65 can bring the rupee under pressure. Such a break will increase the possibility of the rupee weakening to 65.5 and 66 thereafter.

To gain strength, the rupee has to break the 64-65 range within which it has been trading for almost three months. Such a break can take the currency higher to 63.85 and 63.60 levels.