Will bears take over bulls for the rupee or is it going to be a tug of war?

The Indian rupee consolidated in a narrow range for a third successive session, making marginal higher highs despite gains in domestic equities, but lack of cues on the domestic front kept the overall momentum low. As observed, elevated crude oil prices and gains in the dollar in global markets kept the rupee under pressure, contrarily sustained foreign fund inflows and heavy buying in equities capped the weakness.

Yesterday, the gains in the pair were capped near 70.85 levels as the RBI may have intervened to prevent further appreciation in the pair. As evident from the reserves data, there is no denying the fact that, the RBI intervention in FX through forwards and futures has gone up. One year forward which was quoting at 3.70 percent at the end of November has shot up to 4.30 percent now, almost 60 bps move in the last 15 days. This has been corroborated by the RBI’s aggressive intervention through currency futures as well in the last one week. The RBI may be diverting from the spot intervention to create room for OMOs. The RBI may restart OMOs to flatten the yield curve. OMOs are expansionary for rupee liquidity as it increases bank reserves. Hence, if the rupee continues to appreciate the central bank may shift from spot intervention to forwards leading to bond intervention.

Rupee selling zone

Technically, if seen from a broader perspective, the rupee has failed to cross 72.40 levels four times in the last one year which suggested the importance of the resistance lying there. On the downside, the RBI has protected the level of 70.50 in the last couple of months. Therefore the broad range remains 70.50-72.50 where the rupee is been swinging over a few months. Hence, in the medium term 70.50-71.00 remain buying levels and 72.00-72.50 remain decent levels for selling.

However, in the near term the pair is likely to trade between 70.50-71.50 levels where dips close to 70.50-70.70 remains buying zone and spikes close to 71.20-71.50 remains selling zone for immediate exposures.

Globally, the rise in uncertainty around the world in the past two years has been increasing demand for safe havens such as the US dollar, US Treasury bonds, and Gold. The period of US dollar strength is usually associated with rising uncertainty while the greenback tends to depreciate when uncertainty eases. Hence, the recent positive results in the UK following the Conservative’s victory combined with market participants becoming more optimistic regarding the trade war developments should ease the uncertainty and bring down the DXY which has now recovered near 97.50 levels. The House will vote on the two articles of impeachment against US President Donald Trump today. The vote is expected to pass in the House as Democrats hold a majority. Hence, much of an impact on the dollar might not be seen.

Brexit-related concerns

The GBP-USD pair extended its pullback from levels beyond the key 1.3500 psychological mark. The pair tumbled to intraday lows, near mid-1.3000s and erased last week’s massive rally as PM Johnson planned to take a hard line in Brexit talks with the European Union. Revision to the Brexit bill would explicitly rule out any extension to the transition period beyond December 2020, meaning Boris Johnson would leave the EU with a deal or not. Apart from renewed Brexit-related concerns, a wise pickup in the US dollar demand exerted some additional downward pressure on the GBP. This was coupled with possibilities of some short-term trading stop-losses being triggered on a sustained weakness below the support near the 1.3250-45 region. Hence, the pair shall track political developments and the range of 1.2950-1.3300 shall rule for a while.

The euro is also in focus as US and EU officials talk about the importance of reaching a trade deal. Trade relations between Europe and the US are sour but not nearly as the US and China. Positive trade headlines will boost the euro and criticism of EU trade practices by President Trump will hurt it. Markets will eye ECB President Lagarde Speech and Eurozone data for further cues. However, a rise near 1.1160-80 levels is decent levels for selling in the near term.

Amit Pabari is MD at CR Forex Advisors.