Rupee under pressure :: Business Line

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The Indian rupee is slowly beginning to feel the heat of the global dollar strength. The currency opened the week lower at 61.49 on Monday and strengthened to 61.34 on Wednesday. However, it subsequently fell below its key support of 61.50 and dropped to a low of 61.675 on Friday. The currency closed at 61.64, down 0.44 per cent for the week.

Data watch

Macro economic data releases in the past week were mixed. HSBC’s Manufacturing Production Managers’ Index (PMI) inched up to 51.6 in October from 51 in the previous month.

But HSBC’s Services PMI tumbled to a six-month low of 50 in October from 51.6 in September. The trend in the services sector PMI suggests that there is a danger of a fall below 50 — this would imply a contraction in services output. Foreign Portfolio Investors (FPIs) were net buyers of both equity and debt in the past truncated week. They bought $124.6 million of debt and equities worth $718.5 million last week.

Dollar outlook

The dollar index (87.64) extended its rally in the past week, as expected. European Central Bank President Mario Draghi signalling more stimulus measures on Thursday helped the dollar index surge to a high of 88.19 on Friday. However, the index gave back some of its gains in the final trading sessions after US non-farm payroll data failed to match up to market expectations.

The price action in the coming days for the dollar index is going to be crucial. Key resistance is at 88.4 and could be tested in the coming days.

A strong breach of this hurdle will add momentum to the current rally and will take the index higher toward 90 in the coming weeks.

On the other hand, inability to breach 88.4 and a sharp reversal could cause a corrective fall, which will have the potential to drag the index lower to even 85 levels.

All three major components of the dollar index — the euro (1.2450), Japanese yen (114.58) and pound (1.5861) — are trading weak against the dollar.

Rupee outlook

The fall below 61.5 last week is very significant. It has increased pressure on the currency. The level of 61.5 will now be an immediate hurdle that could restrict any immediate rise in the rupee. The rupee could weaken to 61.9 this week. Declines below this level could drag it lower to 62.25 in the short term.

Strength in the rupee is likely to be seen only if it breaches its immediate resistance at 61.5. Such a break could take the rupee higher to 61.35. But the rupee breaching 61.5 looks less likely, based on the charts.

The medium-term bearish outlook remains intact. The key support for the rupee is now at 62.25. A break below this level could see the rupee weaken toward 63.7 in the medium term.

A cup-and-handle pattern formation is visible on the charts, which supports the bearish view for the rupee, and increases the likelihood of the currency falling to 63.7 in the medium term.