The rupee, as expected, extended its fall in the past week. The currency tumbled below the psychological 66 level, to record a seven-week low of 66.50 on Monday.
It, however, managed to recover marginally from this low to close at 66.31 on Tuesday, down 1.26 per cent for the week. The Indian financial markets are closed on Wednesday and Thursday this week for Diwali.
The sharp fall in the rupee was triggered by the strong US jobs data that was released on Friday, post-market hours.
The US non-farm payrolls increased by 271,000 in October, much higher than the market expectation of an increase of 180,000 jobs.
The unemployment rate fell to 5 per cent from 5.1 per cent. The strong jobs data has increased the possibility of a rate hike by the US Federal Reserve in December.
This triggered a sharp rise in the dollar index (99), which breached its important resistance at 98 in the past week and surged to a high of 99.5 by Monday.
As a result, the rupee opened with a huge gap-down below 66 on Monday, and is continuing to trade under pressure.
Apart from the improving unemployment rate, one key indicator which has definitely increased the case for a Fed rate hike in December is the average hourly earnings.
This has been one of the major concerns for the Fed, as mentioned in its monetary policy statements repeatedly.
The earnings growth (year-on-year) in the US, which remained stagnated between 1.9 and 2.3 per cent since 2013, surged 2.5 per cent (year-on-year) in October. This rise could well be used to justify a rate hike.
Following the job numbers, the US retail sales data, due for release on Friday, are also keenly awaited. Strong retail numbers can add strength to the greenback.
The US dollar index which hovers around 99 has strong supports at 98.5 and 98. The outlook for the index is bullish. A rise to test the psychological 100 level is possible in the coming days.
A strong and decisive close above 100 will increase the chances of a rise to 101.8 — the next key resistance for the index.
This week, a series of important macroeconomic data releases are due on the domestic front.
Today, the Index of Industrial Production (IIP) and the Consumer Price Index (CPI) inflation data will be released. This will be followed by the Wholesale Price Index (WPI) inflation numbers for October, on Monday.
Rupee outlook The rupee is currently finding support near 66.50. The currency can strengthen in the near term if it manages to sustain above this support.
A test of 66.2 or even 66 is possible. However, the short-term strength in the rupee is expected to be limited and can face resistances at 66 and 65.80.
On the other hand, the rupee can extend its fall on a break below the support at 66.5. The ensuing targets on such a break will be 66.75 and 66.90.
The medium-term bearish outlook remains intact. The rupee can record fresh lows on a strong and decisive weekly close below 66.5.