Currency Call. Rupee wins the week, ready to rise again

The last week was action-packed for the Indian currency market. The Indian rupee opened lower at 63.46 on Monday.

It fell to a further low of 63.62 on Tuesday and was threatening a sharp fall below 64. However, on Wednesday, thanks to the release of the US Federal Reserve’s minutes of its December 2014 meeting, the rupee gained mojo. The US Federal Reserve’s minutes gave details of its rationale to be “patient” in raising rates.

The currency broke its psychological hurdle of 63 on Thursday. This resistance at 63 had kept the rupee under pressure since December 16. Breaching this level helped the rupee to gather momentum and record a high of 62.28 on Friday before closing at 62.325 - up 1.56 per cent for the week. This is the strongest weekly close since May 2014.

Almost all the market reports suggested that the Foreign Portfolio Investors’ (FPIs) buying of Indian debt helped the rupee last week. But the actual data does not say so. The FPIs had bought just $385.85 million in the debt segment last week. This is not really a substantial amount to justify the rupee strengthening about 2 per cent in a single week from the week’s low of 63.62.

Besides, the FPIs were net sellers in the equity segment and sold $355.97 million last week. The price action on the charts suggests that the sharp move beyond 63 in just two trading days could have been due to stop-loss limits being triggered as the rupee breached 63.

So what was the key take-away from the minutes of the December Fed meeting that helped the rupee? It could be said that while the Fed is satisfied with the overall economic growth, the slow growth in the housing sector is a ‘concern’. Unless there is a strong pick up in the housing segment, the rate hike in the US is not likely any time soon. So, developments in the US housing market will hold the clue to interest rate hike signalling.

The HSBC Services Purchasing Managers’ Index (PMI) was the only macro economic data to be released in the past week. The Services PMI slowed down to 51.1 in December from 52.6 in November. This week will see the release of a slew of important data.

Today the Index of Industrial Production (IIP) and the Reserve Bank of India’s much watched Consumer Price Index (CPI) inflation data will be released.

It will be followed by the Wholesale Price Index (WPI) inflation data on Wednesday. India’s trade balance data is also due for release during this week. The Indian rupee strengthening sharply beyond 63 last week has increased the bullish momentum. However, there is an immediate resistance for the currency at 62.30.

A reversal from here will see the rupee weakening to 62.6 and even to 63 in the coming week. On the other hand, a break above 62.3 can take the rupee further higher to 61.9 in this week.

The short-term outlook has turned bullish and will continue to remain so as long as the rupee trades above 63. The possibility of the rupee strengthening to 61.77 – the 38.2 per cent Fibonacci retracement level – cannot be ruled out while the rupee remains above 63 in the coming days. The short-term bullish outlook will be negated only if the currency decisively falls below 63 in the coming days. Such a fall can then take the rupee lower to 63.5 and 63.8 thereafter.

But the medium-term outlook remains bearish with a resistance, at 61. This is a strong resistance level which has the potential to halt the currency if the rupee extends its rally towards this level.

The dollar index continued to trade strong and extended its rally to record a high of 92.53 last week. However, the mixed jobs data pulled the index lower from this high to close the week at 91.92. A drop in hourly earnings – to $24.57 in December from $24.62 the month earlier – pulled the dollar index lower on Friday.

The resistance at 92.5 has restricted the index from extending its rally last week. There is a strong likelihood of the index moving further lower to 91.5 and 91.3 in the coming week. Only a strong break above 92.5 will bring back the bullish momentum and take the index higher to 93 and beyond.