By Dilip Parmar
The rupee took a beating, declining for a third straight week amid foreign fund outflows, higher crude oil prices and strong dollar demand from the corporates. The emerging market currencies posted their biggest weekly loss since April on expectations that US interest rates are headed higher to tame inflation. India’s inflation breached the top end of the central bank’s target for the first time in three months, validating the RBI’s worries about persistent price pressures. The CPI rose 6.2% from a year earlier, compares with a 5.72% gain in December on the back of a surge in cereal prices.
The jump in inflation will put pressure on the central bank to hike interest rates in the upcoming April meeting. RBI last week raised the benchmark rate for a sixth time since May to 6.5% and kept the dollar open for further hikes by keeping the stance of withdrawal of accommodative. In the week gone, spot USDINR gained 0.82% to 82.50, the biggest weekly rise since December 9. Corporate dollar demand, foreign fund outflows, risk-averse sentiments and broad-based strength in the dollar were the few factors which pushed the rupee lower in the last couple of weeks.
In the near term, the technical set-up for spot USDINR remains bullish. The pair is forming higher tops and bottoms on the daily chart with bullish momentum oscillators and indicators. From the level front, it has strong support around 81.90 and resistance around 82.90. Looking at the greenback against major currencies and Asian currencies, the USDINR pair is expected to head towards 82.90 in the coming weeks. Global equities and bonds that fell last week face their next big challenge with a measure of consumer prices.
The greenback is stronger amid higher Treasury yields as bets grow that the Federal Reserve will need to keep rates higher for longer to stamp out inflation. The DXY gained 0.7% to 103.63 as US 10-year treasury yields spiked to 3.73, up 20bps in the week gone. A stronger-than-expected US economy was always identified as a potential catalyst to revive the dollar, but a month of solid employment and ISM Services numbers can’t upend the negative narrative. It’s all about data now, with inflation the next key, and dollar bears may also hold long FX volatility views this week.
(Dilip Parmar, Research Analyst, HDFC