The rupee continued its weak run last week, losing 0.40 per cent against the dollar to trade at 55.10. Against the euro, the rupee lost 0.97 per cent and currently trades at 70.54. Adding to weak economic data and high current account deficit, the much-lower-than-expected proceeds from the 2G auction escalated concerns about the fiscal deficit. Rising tensions in West Asia and higher crude oil price (Brent is now around $113 a barrel) also exerted pressure on the rupee. It did not help that during the week, foreign institutional investors were net sellers ($168 million) in equity and debt markets.
With economic growth remaining anaemic, some expect the RBI to cut rates in its December mid-quarter policy. But with inflation still high, it remains to be seen whether the central bank will oblige. A rate cut could boost the rupee’s prospects. Meanwhile, if the Union Government is able to pass important legislations in the Winter Session of Parliament, it could benefit the rupee.
Globally, news about positive discussions regarding the US ‘fiscal cliff’ saw currencies gain against the dollar. The euro, despite weak economic conditions in the Euro Zone, gained 0.87 per cent against the dollar. A euro currently yields 1.2815 dollars. The dollar index lost 0.29 per cent to trade at 80.851.
Technical Outlook
Dollar-rupee: The rupee is tantalisingly hovering around 55 against the dollar. As explained earlier, this is a critical short-term support. Failure to break emphatically below this level will mean that the currency can strengthen to 53.7 or 52.8. But breach of this level will drag it down to 56 and then 57.3. The currency is in a medium-term uptrend since the lifetime low of 57.3 on June 22. This uptrend will reverse if the rupee records a strong close below 55. If we consider retracement of the decline since the January 2008 peak of 39.2, the rally from 57.3 has retraced exactly one-third of this move. This implies that the structural trend in the rupee continues to be down with the possibility of weakening beyond 57 over the long term. But there could be sideways moves between 51 and 57 for few months before that occurs.
Future: There is no change in our view for the dollar-rupee future. The contract faces strong hurdle at 55.2, where it is halting. Short-term traders can hold their long positions with stop at 53.9. Targets on break above 55.2 remain at 56.2 and then 57.3. Supports for this contract are at 53.9 and 53.