Currency call. Rupee remains vulnerable

It was a volatile week for the rupee. The currency was broadly range bound and very volatile between 68.36 and 68.86.

The rupee hit a fresh all-time low of 68.86 on November 24 but recovered from there to close at 68.39 — the lower end of the range — on Wednesday.

Foreign Portfolio Investors (FPIs) continue to sell both Indian debt and equity. They sold about $900 million in equity and $1.25 billion in debt in the past week. In November, the equity segment has seen an outflow of $2.69 billion and the debt segment, $3.1 billion.

The rupee is expected to remain volatile as a series of key events are scheduled this week. It will begin with the US non-farm payroll numbers on Friday. A strong payroll data will confirm the next rate hike from the US Federal Reserve on December 14.

The referendum in Italy for amending its constitution is slated on December 4. A “No” vote will see Italy’s Prime Minister stepping down creating uncertainty and adding more volatility in the currency market.

These events will be followed by the hearing of the UK government’s appeal in the Supreme Court against the High Court’s ruling that parliament should vote to trigger the Brexit. The hearing is scheduled between December 5 and December 8.

On the domestic front, the Reserve Bank of India’s monetary policy meeting is scheduled on December 7.

The dollar index has reversed lower from its high of 102 in the past week and is currently at 101. A key support is at 100.6 and if the index manages to reverse higher from 100.6, it can rise to 102 once again.

In such a scenario, a range-bound move between 100.6 and 102 is possible for some time. A strong break above 102 will see the index surging to 103.35. On the other hand, if the dollar index declines below 100.6, it can fall to 100. Further break below 100 may drag the index to 99 thereafter.

The rupee may continue to remain range-bound and volatile between 68.35 and 68.86 for some more time. A breakout on either side of this range will then decide the next leg of movement.

Key resistances are at 68.35 and 68.24. The currency needs to surpass these hurdles to strengthen to 68 levels in the near-term. Inability to break above 68.24 can drag it to 68.85 once again in the coming days.

The short-term outlook will turn positive if the currency breaks further above 68. Such a break will increase the likelihood of the rupee moving higher towards 67.5 against the dollar. The upside in the rupee is expected to be capped at 67.5 at the moment.

On the other hand, 68.85 is an important support for the rupee. A strong break and a decisive daily close below 68.85 will increase the downside pressure. Such a break can drag the rupee lower to 69.3 and 69.7 in the short-term.

The medium-term view remains bearish with strong resistances at 67.5 and 67. A fall to 70.3 — the target of the triangle pattern formed since January — or may be even lower levels is possible over the medium-term.