Rupee has been strengthening steadily since the start of February, sending USD/INR from a high of 63.5 to a low of 60.5 last week. This steady increase against Greenback is impressive considering that market was shaky in the past 2 weeks due to the Russia/Ukraine crisis, which should have prompted investors to put funds into Gold and USD for safe keeping rather than holding highly volatile and riskier emerging market currencies such as Rupee. Certainly credit should be given to RBI for successfully stemming the outflow of funds by instilling back confidence in the Indian markets, but it should be noted that currencies of emerging markets as a whole has stabilized significantly compared to Q4 2013. Outflows have slowed down across all emerging markets, and central banks are confident enough to start slashing rates (e.g. Vietnamese Central Bank) to encourage growth at the risk of weakening their respective currencies.
That being said, INR is still not out of the woods yet. Despite all the bearishness, 60.5 soft support remains intact, and the subsequent rebound pushed prices above the 61.3 resistance level which is also the ceiling of the consolidation zone seen in July 2013. Currently we are trading below 61.3, but we are far away from 60.5 and as such it is still early to tell whether the resistance has held, as we could easily see prices trading above the aforementioned level later in the week, which would increase the likelihood of a bullish reversal towards Channel Top/ceiling of current consolidation that started since October 2013. On the other hand, even if prices managed to stay below 61.3, it is unlikely that bearish momentum can last longer as Stochastic readings suggest that we are very close to the Oversold region. Hence, the most optimistic bearish scenario would see prices pushing towards 60.5 once again, but to test 59.0 based on current momentum may be too tall an order.
Fundamentally, it should also be noted that current push below 61.3 may be contributed to the “feel good” factor brought about by the slight de-escalation between Russia/Ukraine. This is certainly not a good reason for continued INR strengthening, and without any new fundamental improvement in India’s economy, it is difficult to imagine USD/INR able to push further lower on a long-term basis.
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