The rupee seems to be losing its grip. The currency failed to sustain the break above 67 in the past week. It made a high of 66.87 on Monday and has reversed lower from there. It finally closed almost flat for the week at 67.24. Inability to sustain the break above 67 is a negative and paves the way for a decline to 68 and 69 levels once again. The ability to break above 67 will determine the future trajectory of the currency.
Action packed weekThe past week was an action packed one with a series of global central bank meetings and many important domestic macro economic data releases. The European Central Bank reduced its interest rate to zero per cent from 0.05 per cent and also increased its bond purchase to €80 billion from €60 billion. The move took the dollar index sharply higher to 98.4. But the positive momentum was short lived as Draghi indicated that further rate cut is less likely. The euro reversed sharply higher after Draghi’s comments and took the dollar index lower towards 96. On the other hand, Bank of Japan (BoJ) left the interest rates unchanged at -0.1 per cent and left the doors open for additional stimulus, if required.
After the ECB and BoJ meetings, all eyes are on the US Federal Reserve meeting. Janet Yellen’s comments will give us an idea about future Fed rate hikes.
On the domestic front, the macro economic data releases in the past week were mixed. Consumer Price Index (CPI) inflation easing to 5.18 per cent in February from 5.69 per cent in the previous month has increased the hopes of further rate cut from the Reserve Bank of India.
But, the low inflation number failed to provide any support to the rupee as falling exports continue to remain a worry. India’s exports fell for the 15th consecutive month. In February, exports were down 5.66 per cent (year-on-year) to $20.74 billion.
For the coming week, there is no major domestic macro economic data release. So the outcome of the US Fed meeting and the movement in dollar will largely influence the rupee movement.
Rupee outlookTechnically, the reversal last week from the high of 66.87 has happened from the 100-day moving average resistance. This moving average has been capping the upside for the rupee for a long time since July 2014. So there is a strong likelihood that the rupee has begun a fresh leg of down-move. Series of supports are placed at 67.6, 67.85 and 68 which are likely to be tested. A strong break below 68 will completely wipe out the chances of further strength in rupee. Such a break will keep the medium-term bearish outlook intact. It will also keep the danger alive of the rupee breaking below 69 to fall to 69.5 and even 70 levels thereafter.
On the other hand, if the rupee fails to break below 68, then a sideways move between 67 and 68 can be seen for some time. As mentioned above, further strength in the rupee is likely only on a strong break above 67. Such a break will increase the likelihood of the currency strengthening to 66.45 immediately. It will also keep the chances alive for the rupee extending its up-move to test 66 thereafter. As mentioned in this column last week, 66 is a strong medium-term resistance which can cap the strength in the rupee.