Currency outlook: Rupee meanders in a narrow range

The Indian currency market witnessed muted activity last week. The rupee exhibited tight sideways movement between 60.04 and 60.39 against the dollar.

Within this range, the currency fell to a low of 60.39 on Wednesday and then gained ground to close at 60.08 on Friday, up 0.17 per cent for the week.

Fewer talks on the Iraq crisis and Brent crude oil price easing from their high of $115.6 per barrel to close at $113.3 helped limit the fall in the Indian rupee last week. However, developments in Iraq and crude prices will need a close and continuous watch.

Foreign institutional investors (FIIs) also seem to have taken a breather over the past two weeks. They bought $137.8 million in debt and sold $25.8 million in equity in the week gone by. The market will be watching a few important macro economic data releases this week.

As the new Government gears up for the Budget, key fiscal deficit data is expected to be released today. This will be followed by HSBC India’s manufacturing Purchasing Managers’ Index (PMI) on Tuesday and services PMI on Thursday.

The US economy shrinking sharply by 2.9 per cent in the first quarter of 2014 triggered a sharp fall in the dollar index (DXY) to 80.04 last week.

The outlook is turning negative for the index after two weeks of consecutive falls. There exists a possibility of this index extending its fall to 79.75 and 79.5 in the short term.

The Bloomberg Asian Dollar Index (ADXY – 115.94) is giving bullish signals of breaching its crucial resistance at 116. The index is getting constant support near 115.5, its 100-day moving average. A strong break above 116 could take the index to 116.2 and 116.5 in the coming weeks.

A fall in the DXY and a rise in the ADXY are positive signs for the rupee. The rupee is poised near the psychological level of 60. Inability to strengthen beyond this level could take the currency lower to 60.25 in the coming week. It will also keep the short-term 60-60.5 range intact. Alternatively, a breach of 60 could see the rupee strengthen to 59.85 in the coming week.

On the charts, 60.25 and 60.5 are strong short-term supports for the rupee. Failure to breach 60.25 this week will increase the probability for the rupee to strengthen in the short term. In such a scenario, the currency could strengthen to 59.5 in the short term.

However, the medium-term outlook remains negative for the rupee, with strong resistance at 58.85. While remaining below this level, the rupee could weaken to 61.8 in the medium term.