The Hindu Business Line : Rupee decline to continue

The rupee moved conclusively below the 44-mark last week, spurred by dollar demand from importers. The spectacular rally in the dollar was the other factor that contributed to the rupee weakness.

The US dollar index that tracks the movement of the dollar against a basket of six major currencies moved past the resistance at 77.8 and is currently poised under 80. A rally to 82 is likely before this index pauses for breath.

Arbitrage opportunity offered by the weakness of the rupee in the non-deliverable forward (NDF) market is further exacerbating the decline. One-month offshore non-deliverable contracts were quoting at 45.04 on Tuesday. Continued withdrawal of funds by foreign institutional investors is not helping matters either.

Long-term view

The structural trend in the Indian currency is down. If we observe the long-term charts, the rupee has depreciated steadily from 8 (1980) to 49 (2002) against the dollar. This downtrend reversed in 2002 and the rupee then strengthened to peak at 39 this January. This move (from 49 to 39) can be construed as a part of the correction of the structural downtrend in the rupee. The entire corrective phase can extend over a few more years during which the currency would move in the broad range between 36 and 49.

1-month view

The rupee has moved below the key support at 44.1, that is 50 per cent retracement of the move from 49 to 39. Next support for the currency as per Fibonacci retracement levels is at 45.26. If this level is penetrated, the trough formed in July 2006 at 47 would be the subsequent support.

As per e-wave counts, it is now apparent that the move from 39.02 trough is unfolding in the form of a zigzag. The targets for the current decline as per this count are 44.5 and then 46.2. As explained in our last column, the decline can accelerate once the rupee closes conclusively below 44.5. Resistances for the medium term would be at 43 and then 42.

5-day view

The movement of the rupee over the short-term can be confined within a trend-channel and appears to be a running correction. This formation occurs when the underlying trend is very strong and is a precursor to a strong break-out in the direction of the prevalent trend. In other words, the rupee can decline further in the near term towards 45.22 or 45.55.

The trend-line at 44.15 will provide the immediate resistance and the negative view for the near-term will be mitigated only on a close below this level.

Supports – 45.22, 45.55, 45.92

Resistances – 44.15, 43.55, 43.3

Lokeshwarri S. K.

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