The rupee remained in a narrow range over the past week and recorded a minor 0.7 per cent gain. The ruling party winning the vote for increasing FDI in retail in both Houses provided some respite for the Indian currency.
President Barrack Obama’s comment on Monday that he will fully cooperate with the Republicans on proposed tax hikes and spending cuts that will start from next year improved sentiments. Most currencies in the emerging markets, including the rupee, rallied in that session.
One month implied volatility, a measure of expected moves in exchange rates that is used to price options, rose 30 basis points to 10.17 for the week.
Three-month onshore rupee forwards were at 55.19 a dollar on Tuesday and offshore non-deliverable forwards at 55.14 compared to 55.66 and 55.5 respectively last week.
The rupee also gained against the euro and the pound by 1.5 and 0.9 per cent respectively over the past week.
The euro recovered on Monday after falling to a two-week low of 1.287 as concerns on Italy’s political situation subsided. Data showing that Germany’s investor confidence index jumped to a seven-month high on Tuesday also helped the euro.
The index, which aims to predict economic development six months in advance, climbed to 6.9 from minus 15.7 in November. Despite this recovery, the euro is down 0.7 per cent against the dollar for the week
The dollar index, which tracks the greenback against currencies of six US trading partners, gained 0.6 per cent to 80.15. The dollar is expected to remain weak as there are fears that US Federal Reserve will replace its expiring ‘operation twist’ programme with another Treasury bond buying plan.
Buying treasury bonds will depress yields as price of a bond is inversely related to yields. This will weaken dollar as investors will move out of dollar-denominated assets.
Weakness in yen is expected to continue as there is a growing expectations of further stimulus from Bank of Japan.
Dollar-rupee outlook
The dollar-rupee pair moved in a sideways range between 54 and 54.5 over the past week. Our short-term outlook, therefore, remains unchanged. The Indian currency has to rally above 54.1 to indicate that it is heading towards 53.6 or 53.1.
Short-term supports for this pair would be at 54.7 and 55.1. The zone around 56 is a key medium term support for the Indian currency. This level needs to be breached to indicate the possibility of a move to a new low below 57.3.