Rupee weakness continues, with USD/INR continuing to trade higher within the ascending channel that started last late Friday. The mild rally can be attributed to the slight increase in strength of USD coupled with the inherent weakness of Rupee that resulted from RBI’s recent puzzling rate hike.
From a technical perspective, the rising channel has cleared the key 62.50 resistance. This increases the likelihood of prices rebounding higher from the aforementioned level with a bullish target of Channel Top in sight. In theory, we may be able to see some bullish acceleration which could even break Channel Top and even yesterday’s swing high. However, price action has been rather mute since last Friday, and we did not observe any semblance of strong bullish push since, but rather small minute movement higher. Hence it is difficult to imagine price being able to do that this time round even though the bullish break above 62.5 has been “affirmed”.
Looking at Fundamentals, USD will be expected to continue strengthening in the coming months or perhaps years as Fed is expected to taper and end QE eventually. On the other hand, Rupee will continue to be under pressure due to the huge current account deficit that the Government is running, coupled with out of control inflation and lowering growth expectations. Therefore, a long-term USD/INR uptrend isn’t unreasonable.
That being said, it is interesting to see that USD/INR bulls remaining muted despite past 2 days USD strengthening which has seen AUD/USD and GBP/USD given up their entire post FOMC gains. Perhaps the rate hike implemented by RBI last Friday is having some slight impact, keeping bulls mostly in check and preventing a Rupee rout. However, it is likely that RBI will have to implement accomodative measures eventually to shake up the economy, and given that surprise tightening measures have failed to prevent USD/INR from climbing totally, any form of accomodative policy may result in extreme bullish reaction in USD/INR.
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