The rupee declined to 55, down 0.6 per cent against the dollar over the past week. Concern over the current-account deficit and rating agency Fitch’s warning that India may face a downgrade in next 12 to 24 months were responsible for the poor performance. According to Fitch, India’s macroeconomic trends have been disappointing and the Union Government will likely miss its fiscal-deficit target.

Data released on December 31 showed that the current-account deficit widened to a record $22.3 billion in the quarter ended September 30. Besides, concerns that the US Federal Reserve would end its monetary easing policies in 2013 reduced demand for risk assets, thus weakening rupee. For the week, FII’s invested $1.23 billion in stocks and $155 million in debt.

One-month implied volatility, a measure of expected moves in exchange rates that is used to price options, declined by 54 basis points to 9.57 for the week.

Three-month onshore rupee forwards were at 55.92 a dollar and offshore non-deliverable contracts were at 55.91 a dollar on Tuesday compared to 55.60 and 55.61 respectively last week.

The rupee also lost against the euro and the pound by 0.39 and 0.62 per cent respectively for the week. It gained 0.37 per cent against yen.

Unemployment in the euro area rose to 11.8 per cent from 11.7 per cent in October. It is one of the highest figures since 1995. The euro lost 1 per cent against the dollar.

Non-farm payroll employment in the US rose by 155,000 in December and the unemployment rate was unchanged at 7.8 per cent, according to data released by the Bureau of Labour Statistics on Friday.

The Dollar Index, which tracks the greenback against currencies of six US trading partners, gained 0.7 per cent to 80.34.

Dollar-rupee outlook

The dollar-rupee pair could not strengthen beyond 54.20 and the reversal from this level has resulted in 2.2 per cent decline over the last four trading sessions.

Short-term support for the currency is at 55.20 and 55.45. The rupee is currently receiving support at this level. Reversal from this zone will result in the currency strengthening to 54.50 or 54 in the days ahead. Conversely, breach of the support at 55.40 can pull the currency pair to 55.90 or 56.40. As explained earlier, the currency pair is stuck in a sideways range between 54 and 56 in the short term. Since this sideways move occurs after a decline from the peak at 51.30, we maintain a negative medium-term outlook as long as the rupee trades below 54.

future

The pair’s future declined to the low of 54.47 before reversing higher last Thursday. The contract faces resistance at 55.40 and 55.60 in the short term. The daily candlestick chart shows selling pressure at these levels. 1:1 extrapolation of the move from the 54.20 low also gives us the target at 55.60, which was achieved on Tuesday. The contract can now retract to 55.10, 54.70 or 54.20 in the week ahead. Target on a move above 55.60 would be 56.

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