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Rupee hits six-month low of 71.40. What next?

Tue Aug 13 2019

 

The Indian rupee opened with a gap down at 71.16 and ended the day lower at 71.40, the lowest closing level in past six months, amid rising geopolitical tensions across the globe. Crash in Argentine Peso and eventual stock market rout, reported increase in bad loans in the Chinese banking system, inverting German yield curve, non-ending protests in Hong Kong and recent devaluation of Yuan below multi-year low of 7 by China has triggered a fresh round of sell-off in equities and emerging market currencies, as investors chase safe-haven assets like gold, yen and the greenback.

 

Increasing chances of continuing trade conflict between US and China till US Presidential elections in 2020, recent indication by Reserve Bank of Australia about the possibility of reducing rates to sub-zero levels as in Switzerland and Japan and the argument that further rate cuts by central banks would inflate a possible bubble created by a decade of cheap money, point to worrying global scenario.

 

Recent trend

 

The rupee has been steadily weakening since the beginning of the month losing nearly 3.5 per cent. Because, the US Dollar index has softened since the Fed rate cut and the rupee instead of strengthening, has instead lost value against the dollar, shows inherent weakness in our currency and broad concerns overstate the economy.

 

A major reason for the weakness could be FPIs pulling out funds. Also, more than expected rate cuts by Central banks of Australia, New Zealand and Thailand along with India shows that central banks across the globe are concerned with the growth prospects of their respective economies.

 

US Dollar Index

 

Since the rate cut by the Fed, the dollar index has been on the downtrend. Currently, the index has been trading in a tight range between 97.30 and 97.70 during the past week. The comforting factor for a rupee or any other currency for that matter is that the recent dollar bull run has failed to break the critical level of 98 which has been holding since May 2017; although the index has managed to trade beyond the level for a short period of time.

 

However, with growing uncertainties, it would not be surprising if the dollar index breaks above 98 and heads towards an important level of 100.

 

Technical view

 

The rupee after trading between 70.50 and 71.00 against the dollar briefly, broke out of the range and closed at 71.40 on a daily basis. This could further lead to the rupee depreciating in the coming days. The rupee will face a hurdle at 71 and 70.50, while strengthening. In other words, until we see a close above 70.50 on daily basis, traders can continue to go short on the rupee.

 

Looking at the chart of USD/INR we can observe a double bottom pattern. The price target as indicated by it stands at 72.70. Hence all these factors hint a near term weakness in rupee with a higher probability of it hitting 72 and 72.70 until 70.50 holds.

 

Source: Hindu business line.

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