05 Nov 2015 12:11 IST

Pressure mounts on rupee

Strong US jobs data on Friday can make the currency decline further

Three weeks of narrow sideways movement of the rupee has come to an end. The currency, which was stuck between 64.70 and 65.22, witnessed a bearish break below 65.22 last week.

The trigger for this breakout was the expectation that the US Federal Reserve can hike rates in December. As a result, the dollar index surged to a high of 97.8 from about 96.45 in the past week. This, in turn, triggered a sell-off in non-dollar currencies. The rupee fell to a low of 65.71 on Tuesday and closed at 65.49 on Wednesday, down 0.85 per cent for the week.

Actions of Foreign Portfolio Investors (FPIs) also need to be tracked closely. After being net purchasers of Indian debt for three consecutive weeks, these investors have turned net sellers in this segment following the US Federal Reserve meeting.

This suggests that the rupee could come under selling pressure if FPIs continue pulling money out of India. The Nikkei India Manufacturing Purchasing Managers’ Index for October, at 50.7, is at a two-year low. A fall below 50 will signal a contraction phase in manufacturing that can make the rupee weaker.

The euro is trading near 1.0920 and has a key support at 1.08. A strong break below this support can drag the euro lower to 1.05 in the coming weeks.

Such a fall can help the dollar index break above its immediate resistance at 98 and surge to 99 or even 100, going forward.

This could be bearish for the rupee. The US non-farm payroll data is due on Friday. A strong job number could be the possible trigger to take the dollar index higher.

Rupee outlook

Inability to strengthen beyond 64.70 followed by a bearish break below 65.20 has turned the short-term outlook bearish for the rupee. Immediate support is at 65.70 — the 55-day moving average level — which is holding as of now. Inability to break below this support in the coming days can see the rupee strengthening in the near term to 65.2 or even 65.

However, the upside for the currency is expected to be capped and the rupee strengthening beyond 65 looks less probable now.

A strong break below 65.70 will see the rupee weakening to 66 and 66.25 in the short term.

The reversal in the past week keeps the bearish medium-term outlook intact. A strong break and a decisive weekly close below 66.40 will increase the danger of the rupee falling to fresh lows going forward in the medium term.

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