Currency Call. Rupee likely to be range-bound with a negative bias

The Indian rupee moved in a sideways range most of last week. The currency traded between 60.40 and 60.57 from Monday to Wednesday, but on Thursday − the final day in a truncated week − the rupee weakened after recording a high of 60.36. It went on to record a low of 60.695 before closing at 60.51, down 0.07 per cent for the week. Macro economic data releases in the past week were mixed. The rupee could stand to gain from the strong GDP data released on Friday.

The Indian economy grew at a higher than expected 5.7 per cent in the first quarter (April-June) of the 2014-15 financial year. A consequent boost in sentiment and rise in foreign inflows could limit the scope for any fall in the currency.

Foreign Portfolio Investors (FPIs) continued to pump money into the Indian market. They bought $614 million in debt and $271 million in equity last week. Total FPI inflows into both debt and equity markets stand at $30 billion in 2014 so far. This is very close to the $31 billion of inflows seen in 2012, a five-year high. Nevertheless, the fiscal deficit remains a niggling worry. It surged to $53.7 billion in the April-July period of the current financial year. The deficit has already reached 61.2 per cent of the full-year target, putting more pressure on the Government to keep to its deficit target of 4.1 per cent of GDP. Following the mixed data releases last week, the market will keenly watch for HSBC’s Manufacturing Purchasing Managers Index (PMI) and Services PMI data, which are due for release on Monday and Wednesday, respectively.

The strong US GDP data release on Thursday helped the dollar index (82.74) surge last week. Most major currencies continued to weaken against the dollar. While the British pound managed to stave off further declines after falling sharply in the past seven weeks, the euro (1.313) and yen (104) continued to weaken against the dollar. The euro (1.313) fell for the seventh consecutive week and could fall to 1.30 in the coming week ahead of the European Central Bank (ECB) meeting on Thursday.

The outcome of the ECB meeting will be key in determining the direction of the euro. On the other hand, the yen looks likely to weaken further to 105.4 in the coming days. The dollar index has supports at 82.3 and 82 and is likely to rally to 83.5. The US non-farm payroll data release on Friday is a key event to watch for this week and could influence dollar index movement.

While rupee movement was broadly range-bound last week, the price action on the daily line chart suggests that further weakness in the short-term is likely.

The currency reversed lower from its 55-day moving average resistance of 60.38 last week. This has increased the probability of a fall to 60.85 in the coming week. Since both the 21- and 200-day moving average supports for the currency are poised near the 60.85 level, short-term weakness in the rupee could be limited.

A reversal from 60.85 could see the rupee bounce back to 60.4 once again and keep it range-bound between 60.4 and 60.85 for some time.

On the downside, a fall below 60.85 could take it lower to 61. In the short term, the rupee is expected to gain ground only if it breaches its 55-day moving average hurdle. Such a break could take the currency higher to 60 in the short term.

In the medium-term, 59 will be a key resistance for the rupee. A break above the psychological level of 60 will pave way for a further up-move to 59. However, a move above this level looks less probable at this juncture. On the other hand, a more probable reversal from 59 could drag the rupee back to 61 and 62 levels in the medium term.