Outlook for rupee turns negative

It was a volatile week for the rupee. Increasing nervousness in the market on the back of the on-going sell-off in the domestic as well as global equity markets saw the rupee swing between 64 and 64.45 all through last week.

The currency closed at 64.31 on Monday, down 0.38 per cent for the week.

Dollar strengthens

A surge in US treasury yields, coupled with sell-off in global equities, are helping the US dollar regain strength.

The US dollar index witnessed a strong rise last week breaking above the key resistance level of 89.8.

The index has surged over a per cent and closed on a strong note above 90 last week. The level of 89.8 will now serve as a strong support and is likely to limit the downside in the short term.

While above 89.8, the dollar index can move up to 91 in the coming days. A break above 91 will then increase the likelihood of the upmove extending towards 92 in the short term. A strong US dollar can can take the rupee further lower in the coming days.

Watch the FPIs

Along with the dollar, foreign portfolio investors (FPIs) will also need a close watch in the coming weeks. After buying Indian equities consistently for six consecutive weeks, the FPIs turned net sellers last week.

They sold $1.15 billion in Indian equities in the past week. If the sell-off in global equities intensifies further, which is highly possible in the coming weeks, Indian equities will witness more outflows from the FPIs. This, in turn, will cap the upside in the rupee and can keep the currency under pressure.

Also, if the outflow spills over to the debt segment, the fall in the rupee might gain pace. In such a scenario, the possibility of the rupee weakening toward 65, 65.5 or even lower levels cannot be ruled out.

Rupee outlook

The rupee has key support in the 64.40-64.50 region. Both the 100- and 200-day moving averages are poised between 64.4 and 64.5.

As long as the currency sustains above 64.5, a range-bound move between 64 and 64.5 can be seen in the near term. However, the bias will remain bearish for the rupee to break below 64.5 since the US dollar index is looking strong.

An eventual break below 64.5 will see the rupee weakening towards 65 in the short term. The rupee will get a breather only if it breaks above 64 decisively. Such a break, though less likely, can take the currency higher to 63.85 or 63.8.

The price action since the beginning of 2018 is turning the bias negative from a medium-term perspective as well. Several weeks of narrow consolidation between 63.3 and 64 followed by a strong fall below 64 now has increased the possibility of the rupee weakening towards 66 in the coming weeks over the medium term.