By Dilip Parmar
The five weeks rally in the rupee paused this week as the central bank and oil importers aggressively bought the dollar to fulfil their month-end commitments. The Indian rupee becomes the worst-performing currency among the Asian currencies as the domestic equities underperform following foreign fund outflows ahead of the union budget. In the week gone, spot USDINR gained half a percentage to 81.52.
The dollar index trimmed a modest weekly loss amid higher Treasury yields as traders await policy meetings next week and China’s return from a holiday break. The shift in correlation between the SPX index and the dollar index suggests the greenback is losing its haven status. The 30-day correlation between them is about 0.56, falling from 0.8 in October.
What to Watch
Next week is a crunch week. We have India’s union budget, decisions from the Fed, ECB, and Bank of England and the last US jobs report.
Domestic traders will eye India’s budget for a directional trade. The taxman is hoping for relaxation in tax by way of revision in tax bracket, and the industry expects relief packages ahead of the 2024 general election. While the government will try to cut the deficit and achieve growth.
The Fed faces a dilemma at the Jan. 31-Feb. 1 FOMC meeting (Wed.). On the one hand, inflation data had come in softer than expected, and activity indicators have shown slowing momentum over the past month. On the other, financial conditions have eased as traders believe the Fed will soon switch to rate cuts. The FOMC is to raise the Fed funds rate to a target range of 4.5%-4.75%. The European Central Bank and Bank of England will take centre stage in the week ahead as both looks set to raise interest rates by 50 basis points.
– Technical set-up for spot USDINR remains bearish as long as it trades below 82.20, the 50-day simple moving average, and on the downside, the recent bottom of 80.88 acts as good support.
– USDINR Feb fut. resisted at 81.75, the 10 DEMA. It has been trading in a bearish sequence of lower tops and bottoms on the daily chart.
– Momentum oscillator, a Relative Strength Index of 14 days placed below 50 indicates negative momentum. However, the MACD has given hope to bulls with a positive crossover.
– The long build-up has been seen with a rise in price, open interest and volume.
– Looking at the above technical evidence, the bias remains bearish as long as USDINR trades below 82.20. In the near term, the pair is expected to consolidate between 80.90 to 82.50.
(Dilip Parmar, Research Analyst, HDFC Securities. Views are author’s own.)