The past several days has seen the currencies of emerging markets sharply appreciating against the US Dollar.
- By Milan Vaishnav
The past several days has seen the currencies of emerging markets sharply appreciating against the US Dollar. Among the pack, the Indian Rupee has seen the best performance while leaving its immediate rival Russian Ruble far behind. When the INR tested 68.4075 in the morning trade yesterday, it hit a yet another 9-month high against the greenback. The Indian currency has appreciated over 6.5% during this period.
Having said this, there are several factors that are acting against the US dollar along with few factors that are additionally acting in favor of Indian Rupee as well.
The economic data from the US has not been healthy lately. The Federal Reserve began its 2-day meet yesterday. This meeting is the one associated with a Summary of Economic Projections as per the official data from the Federal Reserve’s website. It is widely expected that Fed will take a breather from raising the interest rate. It is also likely to be less aggressive on monetary tightening and would keep its stance dovish.
The combination of disappointing US economic data and the wide consensus that the Fed will be less aggressive on monetary tightening front has had an adverse impact on US Dollar. The US Dollar has depreciated against major currencies including those of emerging markets.
If the US Dollar remains stable and does not appreciate, the emerging markets usually benefit in term of dollar inflows. Among all emerging markets, India is placed much better as compared to other Asian peers. The reasons behind the gush of dollar inflows in India are favorable macro-economic data, improved balance of trade, and above all, the perceived political stability which is widely expected to remain post the General Elections. All these factors have collectively lent Rupee the impetus that it required to appreciate so sharply.
In the present situation, it becomes important to know how far such rapid appreciation of the Rupee can go and what levels will be important to watch for over coming days.
The zone of 68.80-69 is a very important for the Rupee. It was a multi-point multi-month resistance which the USD took out after resisting it for over 30 months as evident from this weekly chart of USDINR. From the technical perspective, this level which was a major resistance point until it was taken out, should now act as support for the US Dollar. Though a minor breach of this level was seen yesterday as the Rupee tested its high of 68.4075, the US Dollar has managed to recover after that.
We expect the Rupee appreciation to take some breather and do not expect the Indian currency to breach the 68.80 level significantly. Some recovery for dollar is expected from here. RBI is also expected to intervene at current levels as such sharp appreciation also hurts exporters and has some negative effects of its own.
Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services. The views expressed are author’s own.