The rupee continued to trade strong over the past week, extending its rally for the second consecutive week. The rupee closed on a strong note above 65 for the first time since August 12. The currency breached the psychological 65 level on Wednesday and went on to close above this level. It has gained 0.97 per cent against the dollar last week and is up about 1.6 per cent in the past two weeks.

Data watch Weak economic data from the US has supported this rally. It began with the release of the Institute of Supply Management’s (ISM) Manufacturing Index on Thursday. The index fell to 50.2, the lowest since May 2013. This was followed by the jobs data on Friday, which showed that the US added 142,000 jobs, lesser than the market expectation of 202,000 job additions.

The slowdown in US exports could continue to be a worry for the US Federal Reserve. Goods export by the US fell 3 per cent in August to $124.46 billion while overall exports were down 2 per cent to $185.10 billion. The trade deficit widened to $48.33 billion in August from $41.81 billion in July.

The weak economic data releases from the US appear to have assured the market that the Federal Reserve might not hike interest rates just yet. As a result, the weak domestic manufacturing data failed to create any negative impact on the market. The Nikkei India Purchasing Managers’ Index (PMI) fell to a seven-month low of 51.2 in September. This data will need a close watch in the coming months. For, if the index falls below 51, then there could be an increased danger of India’s manufacturing activity entering a contraction phase. This can have a negative impact on the rupee.

For the coming week, the Index of Industrial Production (IIP) and Consumer Price Index (CPI) inflation data on Monday and the Wholesale Price Index (WPI) inflation numbers on Wednesday are the key data releases to watch for.

The rupee closed on a strong note on Wednesday, above 65. The short-term outlook for the rupee remains bullish. Key support is at 65.4. The possibility of a sharp decline is remote as long as the currency trades above this support level. The currency is more likely to strengthen further. But there are key resistances ahead, which can slow down the pace of the upmove in the coming days.

The rupee can move higher in the coming week to test the next resistances at 64.62 – the 21-week moving average, and 64.40 – a trend-line resistance level. Inability to break these resistances can trigger a corrective fall towards 65 and 65.2 once again in the short term.

But if the rupee manages to surpass the hurdle at 64.4, it can extend its rally to 64.2 and 64 thereafter.

However, the upside is expected to be restricted. Strong medium-term resistance is present in the 64-63.8 zone which is likely to halt the current rally. A break above this resistance zone looks unlikely. A reversal from here will increase the danger of a revisit of 66 or even lower over the medium term.

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