CURRENCY CALL. Rupee off to a dull start in the New Year

It is not a good beginning for the rupee this New Year. The strong upmove from the December low of 67.13 reversed suddenly as the year began. The rupee made a high of 66.09 on December 31 and started to decline from there. It fell to a low of 66.84 and closed near this low on Wednesday. The currency is down 0.66 per cent for the week.

The trigger for this fall was the weak manufacturing data from China, that caused a sell-off in other global stock markets too. On the domestic front, the Nikkei India Manufacturing Purchasing Managers’ Index (PMI) fell to 49.1 in December from 50.3 in the previous month. This added to pressure on the currency.

Data watch The coming week is packed with some key macro economic data releases. It starts with the important US non-farm payroll and the unemployment numbers on Friday. Strong job numbers could aid the dollar index (99.50) surge past the psychological 100-mark. This is a negative for the rupee.

On the domestic front, inflation based on the Consumer Price Index (CPI) and the Index of Industrial Production (IIP) data releases are due next Tuesday. The CPI has turned higher in the last couple of months and a further rise in the inflation numbers would be negative for the markets as it would reduce the probability of future rate cuts by the Reserve Bank of India.

Rupee outlook Inability to break above 66 and a strong reversal from 66.08 is a negative for the rupee. Technically, the 21-day moving average at 66.03 is continuing to resist any short-term rallies in the rupee. It is also capping the upside for the currency consistently, ever since the rupee declined below 60 in August 2014. So, unless the rupee breaches this 21-day moving average hurdle or the level of 66 there is little chance of a short-term rally in the currency.

The immediate outlook is bearish. The rupee can fall to test 67 this week. A break below 67 can take it lower to 67.2 thereafter. Further break below 67.2 can drag it to 67.4 or even lower in the short term.

A strong break below 67 will also strengthen the medium-term downtrend. This will open the doors for a fresh fall to 68 or even 68.3 over the medium term. The rupee has been moving within a bear channel since mid-2014. The channel resistance is poised at 68.3-68.5. A fall to test this channel resistance in the coming weeks over the medium term cannot be ruled out.