Currency Call. Rupee not out of the woods yet

What an eventful and volatile week it was! The Indian rupee opened the week on a stronger note at 61.63, but failed to sustain. The spoiler came in the form of India’s trade deficit widening in October, as gold imports surged.

The rupee tumbled, breaking the psychological 62 mark to a low of 62.22 on Thursday. It, however, recovered immediately from there to close at 61.77 on Friday, down 0.09 per cent for the week.

India’s trade deficit widened to $13.4 billion in October from $10.6 billion the year earlier. The increase was in spite of a sharp fall in crude oil prices, which has helped limit the deficit. Gold imports surged nearly four-fold to 106.3 tonnes ($4.2 billion) in October on the back of strong festive demand from just 26 tonnes ($1.1 billion) a year ago. The jump in gold imports is not a good sign and has increased talk of tightening import curbs that were eased earlier.

The market would be closely watching Parliament’s winter session — which starts today — for any strong reforms. In the absence of significant economic data releases this week, the rupee would be largely influenced by global developments and dollar movement and any key announcement from Parliament.

Foreign portfolio investors (FPIs) continue to buy Indian debt and equity. They bought $715.5 million in debt and $205.3 million in equity in the past week.

While the strong FPI inflows are helping Indian equity benchmark indices hit record highs, it has not supported the rupee in gaining ground as the global dollar strength weighs on the currency.

The dollar index (88.31) closed strong above 88 last week. The euro was derailed on Friday on European Central Bank President Mario Draghi’s comments to ‘do what it takes to raise inflation’. The euro (1.2390) dropped against the dollar and the dollar index breached its hurdle at 88 and closed strong for the week.

The question for the euro is – how low can it go? It can extend its fall to 1.2230 or even 1.2130, which are its key support levels. The dollar is looking strong against the British pound (1.5656) as well as the Japanese yen (117.79), the other two major components of the dollar index. The pound can fall to 1.55. A break below this level can drag it further lower to 1.52. The yen recovered from its low of 119 against the dollar. It could stay in the broad range of 115-119 within its overall downtrend in the short term.

China surprised global financial markets with a rate cut on Friday. Sure, the commodities and the equity markets celebrated this move with a sharp rally, but major currencies were unfazed. They continue to remain weak against the dollar and the dollar index is expected to continue with its current trend.

The index has a key resistance near current levels at 88.44. A strong break above this level will open the doors for a further rally to 90.

On the other hand, a reversal from 88.44 can drag the index lower to 88 and 87.5.

No doubt that the Indian equities will be set to hit fresh highs again, taking cues from global equity indices. But on the rupee front, one has to wait and see how China’s move is going to influence the currency movement.

The sharp and immediate reversal from the low of 62.22 is significant technically. This reversal has happened from just below a key trend line support level.

Immediate resistance for the rupee is at 61.70. A breach of this hurdle can see the rupee strengthen to 61.5 this week. The short-term strength in the rupee is expected to be limited to 61.5 as this level is a strong support for the dollar.

An immediate break of this level looks less likely. A reversal from here can take the rupee lower to 62 once again.

A strong close below 62 will now exert more pressure on the currency. In such a scenario, it can fall to 62.30 in the short term.

For the medium term, 62.35 is a key support for the rupee. Both the trendline as well as the 38.2 per cent Fibonacci retracement support levels are poised near 62.35.

A strong break below this level can drag the rupee lower to 63.6 in the medium term.

However, inability to breach 62.35 can keep the rupee range-bound between 61 and 62.35 for some time.