Currency Call. Currency call: Rupee likely to extend its fall

The Indian rupee fell sharply last week after remaining range-bound in the previous fortnight. It failed to strengthen beyond 60 and dropped from its high of 60.05 on Wednesday to close at 61.18, down 1.8 per cent, its biggest weekly fall since January.

Strong US GDP data triggered the initial fall. This downtrend gathered momentum on Friday after Argentina’s debt default. Indian stock indices also tumbled after the country refused to ratify a $1 trillion WTO trade pact.

Concern over the slowing pace of foreign portfolio investor (FPI) inflows into equities is getting stronger. The FPIs turned net sellers of equity last week, offloading $257.68 million. However, they purchased $866.5 million in the debt segement. The rupee may come under more pressure if the equity sell-off intensifies.

The economic data releases last week were a mixed bag. The fiscal deficit widened to ₹2.98 lakh crore in the April-June quarter, 56.1 per cent of the current year target of ₹5.31 lakh crore. The HSBC Purchasing Managers’ Index (PMI) rising to 53 in July from 51.5 in June failed to prop up the currency market. Services PMI data is due for release this week. The key event to watch for, though, is the RBI monetary policy review on Tuesday.

Strong US GDP data released last week helped the dollar index surge to test its resistance at 81.5. But the index reversed lower on jobs data that failed to meet market expectations. A break of 81.5 could take the index to 82. But while below 81.5, test of supports at 81.15 and 81 looks more likely.

The rupee tumbled below the key support of 60.5, which has been holding well for over a month. The currency closed below its 200-day moving average at 61.02 and could fall further to 61.3 in the coming week. A drop below this level could take the currency lower to 61.4, which is the 61.8 per cent Fibonacci retracement level. The short-term outlook will turn bullish only if the rupee breaches 61. Such a breakout could take the currency higher to 60.5.

The medium-term bearish view remains intact for the rupee. It has formed a bear and complex head-and-shoulder pattern on the chart. The fall last week occurred from the neckline resistance level of the pattern, which is at 60. A decline to 62.3 in the medium-term is probable. Intermediate support for the currency is at 61.8. Key hurdles for the rupee are at 60.5 and 60.