After hitting record highs last week, Rupee gained strength significantly, pushing back to the previous swing high in 2012 Jun. However INR bulls wasn’t able to break below the key level, closing the week above and giving USD/INR bulls a window for breakout opportunity. Bulls certainly did not disappoint, trading higher since yesterday and clocking in the strongest gains since 10 June today. This enhances the case for a bullish breakout, and opens up a long-term bullish target of 65.7 (161.8% Fib extension of rally from Aug 2011 – Jun 2012, not shown on chart).
The fundamentals are also in favor of further weakening of INR, with Reserve Bank of India reported to buying INR in order to stem the slide. By trading back towards the recent high, we can see that market force is much more than what the Central Bank can do via the secondary market, which is a strong plus for USD/INR bulls. With a record current-account deficit, there is very little India can do to strengthen INR back other than re-raising key interest rates, which it has cut by 0.75% YTD. With the continued threat of economic slowdown, it is unlikely that RBI will sacrifice the economy growth for currency, which is yet another point in USD/INR bulls’ favor.
With Gold prices at recent lows, and the falling INR, it is foreseeable that more and more Indian traders will import higher Gold in exchange for the currency as form of safety. With that in mind, we should be expecting to see the Government implementing Gold import restrictions soon, but even if they manage to stem the outflow of INR, USD strength by default may bring USD/INR higher for the rest of 2013 especially if the Fed does taper QE3 in 2H 2013.