Currency Call. Rupee on a slippery slope

The Indian currency market saw unusual volatility last week. The rupee opened with a huge gap-down at 62.63 following strong US jobs data, which heightened rate hike fears. The currency recorded a low of 62.87 on Wednesday before reversing higher to 62.49 on Thursday. But a sharp sell-off in equity markets on Friday played spoilsport and took the rupee back to 63 before it closed at 62.97. The currency is down 1.28 per cent for the week, the biggest weekly fall since December 2014.

The sell-off in Indian equities was triggered by Consumer Price Index (CPI) inflation rising for the second consecutive month to 5.37 per cent in February from 5.19 per cent in January.

This dashed market hopes of continuing rate cuts by the Reserve Bank of India. Benchmark indices tumbled over a per cent on Friday. The inflation data overshadowed marginally better Index of Industrial Production (IIP) data released on the same day. The IIP grew by 2.6 per cent in January, compared to 1.1 per cent in the same month a year ago. However, growth has continued to slow from 3.23 per cent in December. Wholesale Price Index (WPI) inflation data is due for release today.

The other data point that had a bearing on the rupee was trade numbers for February. These showed a sharp 15.6 per cent fall in imports, which pulled down the trade deficit to a 17-month low of $6.85 billion for February. While this was positive, weak export numbers spoiled the party. India’s exports in February contracted 15 per cent (year-on-year) to $21.5 billion. They have fallen for the third consecutive month. The trade data was released after the market hours on Friday and so the rupee could feel the impact on opening.

Foreign Portfolio Investors (FPIs) seem to have cooled off a bit towards India last week after massive purchases of $4 billion in equity and debt over the preceding three weeks.

Over the week, they bought $180.19 million worth of debt and $365.52 million of equities. A further slowdown in inflows could keep the exchange rate under pressure.

The one major event which the entire global financial market is awaiting this week is the outcome of the US Federal Reserve’s meeting on Wednesday. Even small changes in the Fed’s tone would be watched for signals to the beginning of the rate hike cycle. Such an event could take the Indian rupee south.

The US dollar index (100.18) surged for the third consecutive week and closed higher by 2.5 per cent last week.

The outlook remains bullish and the index can rise further to 101.5 levels. The euro (1.0494), British pound (1.4740) and the Japanese yen (121.37) are all looking weak against the US dollar. The euro has closed just below its important intermediate support at 1.05. The inability to reverse decisively above 1.05 could put pressure on the currency. As pointed out in this column over the last two weeks, the euro looks set to reach parity against the dollar in the coming weeks. The next important support is visible only at 0.9850.

The British pound can fall to 1.45 and the Japanese yen to 122.6 against the dollar. A fall in these major currencies can easily take the dollar index higher to test its critical resistance. Global dollar strength is bound to cap upside for the Indian rupee.

The sharp reversal and fall on Friday has led to the rupee breaching important supports at 62.7 and 62.83, which are the trendline and 61.8 per cent Fibonacci retracement levels, respectively. This could keep the currency under pressure. Technically, the level of 62.7 will now act as a strong support-turned-resistance for the rupee that can cap the upside for the currency this week.

The outlook is bearish and the rupee can fall to 63.1 and 63.25 this week. A break below 63.25 will see it weakening further towards 63.4 and 63.6 in the short term. The short-term outlook will turn positive only on a decisive break above 62.7. In such a scenario, the rupee can move higher to 62.4 or even 62.1.

The rupee is on the verge of hitting our medium-term targets of 63.6 and 64. Whether the rupee is going to breach 64 or not will decide the next leg of move. A reversal from 64 could ease the pressure on the rupee and keep it within the broad 61-64 range. But if the rupee falls below 64, it can decline to 65 thereafter.

On the charts, a fall below 64 will be a very bearish sign. It will confirm a head-and-shoulder continuation pattern that will put the currency in significant danger of revisiting lows of 68. Though it is early to take a call yet, caution will be the watchword in the coming days.