CURRENCY CALL. Rupee struggles to gain momentum

The recovery in the rupee witnessed in the first two weeks of this month, came to a halt last week.

The currency traded on a weak note all through the truncated week and fell, breaking below 65 to a low of 65.16 on Wednesday. The currency managed to recover from this low and closed at 65.02 on Monday, down 0.5 per cent for the week.

With no major domestic data release scheduled this week, the movement in the US dollar would largely impact the rupee’s move.

The dollar index has been stuck in a narrow range between 93 and 94 over the past three weeks. The index is currently hovering below the upper end of this range at 93.90. The bias is bullish as the price action on the daily chart reflects a bullish inverted head and shoulder reversal pattern.

The neckline resistance is at 94.30, which is likely to be tested if the index breaks above 94. A strong break and a decisive close above 94.30 will confirm this pattern.

Such a break will increase the likelihood of the dollar index targeting 95 or even higher in the coming weeks. Such a rally in the dollar index can keep the rupee under pressure for a fall to 66 levels.

The European Central Bank (ECB) meeting on Thursday and the US GDP data release on Friday are the key events to watch for this week, which might create volatility in the dollar index.

Following a muted September, foreign portfolio investors’ (FPIs) interest in Indian debt picked up this month. FPIs have bought $1.85 billion in the debt segment so far this month.

On the other hand, FPIs continue to sell Indian equities. After selling about $4 billion in the previous two months, they have sold $695 million so far this month. If this selling spree spills over to the debt segment, the rupee could come under pressure.

The immediate outlook for the rupee is mixed. The currency can strengthen if it manages to break above 65.

Such a break can see the rupee strengthening to 64.8 levels again. Further break above 64.8 can take the currency higher to 64.5 or 64.4 thereafter.

However, the bullish outlook for the dollar index indicates that the upside in the rupee could be limited. It also leaves a strong possibility of the rupee eventually weakening in the short term.

Immediate support for the rupee is at 65.20. A strong break below it can take the rupee lower to 65.5 initially. Further break below 65.5 will increase the possibility of the currency weakening to 66 levels thereafter.

Such a move in the rupee will lead to a negative bias from a medium-term perspective as well.

A strong fall below 66 will pile renewed pressure on the rupee for revisiting 67 levels over the medium term.

But if the rupee manages to reverse higher from 66, it can continue to retain the 64-66 range for some more time.