Indian Rupee weakens today, in line with other emerging market currencies as risk appetite of Asian market has deteriorated following the same during US session yesterday. This broad decline isn’t really unexpected as market has been overly bullish in the past few days leading up to Yellen’s first monetary policy testimony to the House of Representatives. Even though the new Fed Chairman isn’t really upbeat about market recovery and has actually affirmed that more taper cuts will be coming, US stocks and risk correlated assets remained bullish. This irrational behaviour set up a high possibility of an eventual pullback, which brings us to today’s mild bearish sentiment which may well be the beginnings of a long-term bearish move.
Latest economic data also favor a weaker Rupee. Growth rate of Consumer Price Index has eased more than analysts expected, reducing the need for RBI to hiking rates further. On the other hand, Factory Output has fallen and the call for more relaxed monetary policy to favor growth is getting louder.
However, despite all these, short-term bearish trend in USD/INR remains intact. Prices did rallied rather significantly from 61.7 – above 62.1, but we’ve yet to break the descending Channel Top nor above to breach soft resistance of 62.2. Stochastic indicator is also showing early signs of a bearish cycle signal, favoring a move towards Channel Bottom and continuing the bearish trend that has been in play since 4th Feb. This is a good testament for Rupee’s resilience, and we could actually see even more buyers of Rupee in the near term as carry traders may be more confident holding onto the previously battered currency.
This notion isn’t far out – in the month of Feb, India has witnessed outflows of just $316 million opposed to Thailand’s $493 million, South Korea’s $1.2 Billion and Taiwan’s $2.4 Billion USD, showing the attractiveness for Rupee denominated assets. Hence, short-term direction for Rupee should remain up (bearish for USD/INR), but long-term direction may be a little bit more tricky. Given this relatively strong international demand, RBI will definitely be more comfortable cutting rates in the future as that is definitely necessary as India’s growth potential continue to remain weak. Hence, long-term downside risk for Rupee is high, and that is even before we take into consideration the expected gain in strength by USD due to inflows of funds back into US coupled with the tapering of QE purchases.
Technicals agree as well, with the uptrend that has been in play since August 2011 remaining intact. Even though price has rebounded off the Channel Top, Channel Bottom does not appear to be a viable bearish option right now as there is a significant support seen at 61.3. Even if 61.3 is broken 59.0 will be expected to be able to finish the job with Stochastic readings most likely being deeply Oversold even before the latter support level is tested. Nonetheless, a move towards 61.3 is possible, and traders will need to determine if potential short-term gains from shorting now is enough to outweigh the potential risk of long-term weakness of INR.