USD/INR retreated slightly after hitting the Fibonacci Extension level mentioned yesterday, but the decline did not last long, with prices quickly breaking the Fib Ext level following a rebound on the rising trendline. Currently we’re looking at prices pulling back significantly, suggesting that bullish momentum may be over for now. Stochastic readings agrees, suggesting that prices may be pushing back towards the trendline once more. This is not surprising as there wasn’t any fundamental reason why USD/INR rallied so much during Asian hours. It seems that the rally was due to stops being triggered along the way, while speculators/bullish traders went with the flow, resulting in the strong rally which sent USD/INR hitting a high of 69.15.
Looking at fundamentals, India’s economy is still leaking foreign funds out of its coffers. There has been nearly USD 1 Billion worth of sales in stock market in the past 8 trading sessions. With sizable Foreign Holdings still remaining, the selling is unlikely to stop, and means continued weakness for the Rupee in the near-mid term unless RBI start to stem the tide by introducing long-term economic stimulus plans, or resort to a ban of foreign transaction altogether until the economy recovers. It is unlikely that India will resort to that as that would mean a total cut off from global financial system, potentially even years after recovery has ended just like Malaysia did during the Asian Financial Crisis of 1997. However, if RBI/Indian Government does not do it, they will most likely need to seek IMF funding just like Thailand, Indonesia and Korea did in order to tide over. Do nothing, and we may see USD/INR continue higher in the next few months even without USD strengthening.
Technical wise, there is no reference point on where the next resistance level may be. Using the same Fibonacci Extension sequence, the 261.7% Extension stands at around 76.2, but that is a long way from here and may not be immediately relevant for trading purposes right now. For current relevancy, traders may wish to wait for a break of 69.15 for signs for upward breakout extension, or a breach of the ~67.4 which will open up 65.7 for bearish target. However, given the broad bullish pressure building up, count-trend trades will be certainly much more riskier and brave traders who short USD/INR may need to accept the high likelihood that bearish targets may not be reached before bullish sentiment takes over again.