Huge currency fluctuations were see last month. The euro, dollar and yen gyrated in both directions. The Swiss have taken desperate measures to prevent Franc strengthening. The Chinese, with their vast reserves have at times been reassuring; at other times they’ve issued thinly veiled threats to use their muscle.
The rupee is swinging a lot as well. (Note: any technical analysis should invert the scale on the dollar/rupee chart for obvious reasons.) It dropped from Rs 45.9 /dollar in early September to recent lows of Rs 48.12 before a pullback till Rs 47.35. At least part of the volatility is a spinoff from the euro-dollar gyrations.
The pullback till Rs 47.35 conforms to a Fibonacci retracement level. From a purely technical standpoint, some more strengthening with a move till between Rs 46.75 and Rs 47.00 is very likely. The Reserve Bank of India’s (RBI’s) 25 basis point policy rate hike will help such a pullback. Even a pullback till Rs 46.30 is possible if there are a couple of sessions of strong net FII equity buying.
But the charts also suggest the next downswing would take the rupee beyond Rs 48.15, maybe down till Rs 48.50. This is not a free market so technical projections carry even larger error values than normal.
RBI action suggests the central bank will draw a line in the sand somewhere between Rs 48.10 and Rs 48.50, where it will support the rupee. On the upside, it must prevent the rupee rising too much but it is not clear where that resistance line will be drawn.
What we can predict with some confidence is that volatility will continue, at least until the euro and dollar stabilise. On average, there have been swings of 30 paisa a session with higher movements on Mondays and Friday. Given excellent leverage and liquidity on rupee-futures contracts, there is ample opportunity to make a quick buck trading.
There seems to be a secular rupee downtrend in force. Most trend-following technical trading systems suggest the best action would be to try selling the rupee and buying the dollar over the next 2-4 weeks. The caveat is that RBI could intervene with devastating effect.
More From This Section
Fundamentally, a weaker rupee will not necessarily be immediately positive for exports. The rupee weakness does make exports more competitive. But the real issue at the moment is low demand in recessive economies, rather than the price of Indian goods and services.
What could get interesting is the effect on the accounts of exporters and importers. Treasury departments will have to work overtime to ensure exposures are properly hedged. There could be huge blow ups if they misjudge the situation.
The author is a technical and equity analyst