Coronavirus impact on Asian currencies: What’s next for Indian rupee?

In my earlier report, I had mentioned that rupee is forming a triangular pattern and the range of the pair is getting compressed as it is constantly making lower highs and higher lows pattern. This calm momentum of rupee was strongly signalling a breakout in the narrow range of 71.10-71.45 with a target of 71.80 levels.

Also Read: Is rupee’s silence hinting at an upcoming storm?

Fundamentally, despite many adverse factors in the overseas markets, the rupee showed no significant negative impact until last week. However, things changed when the spread of the coronavirus beyond mainland China into some Asian countries has significantly weakened the Asian currencies against the dollar. The rupee is not insulated from the infectious effect and the domestic currency might give further surprises.

Now that the target of 71.80 is achieved on Thursday, what’s next on the cards? Let us analyse below-mentioned factors to understand what the reasons for depreciation are and what can prevent further losses in the pair.

Reasons why rupee can depreciate towards 72.20-30 levels:

• Dollar Index trading near current year highs close to 99.60 levels.
• Chinese Yuan depreciating beyond 7.00 mark past two consecutive trading sessions.
• Stock markets reacting negatively with Nifty falling by almost 320 points in past two sessions following the losses in Dow Jones.
• Retail inflation at the highest and growth at the lowest.
• For the sixth consecutive month, India’s exports fell 1.7 percent in January 2020, while imports also dropped for the tenth month in a row pushing up the trade deficit to a 7-month high of $15.2 billion.
• Noting the rising pace of decline in exports which is highest in nearly six months, the impact of the coronavirus on trade in the coming months might get reflected as a further deceleration in India’s export growth.
• Amidst lower global demand, it is imperative for the RBI to keep the nominal value of the rupee at above 71.00 mark to maintain competitiveness in the exchange rate to boost export growth.

Reasons for rupee to not depreciate beyond 72.40 mark before March 20:

• Inflows expected ahead of SBI card IPO and PI industries planning to raise up to Rs. 9000 cr and Rs. 2000 cr respectively.
• Seasonality effect for the rupee where the pair has appreciated 8 on 10 times in past decade for the month of March.
• RBI had bought aggressively near 71.10-20 levels to build up reserves and therefore there is a high possibility that the apex bank will sell on any rise above 72.00-72.20 mark in order to book profit and also keep fiscal deficit in check.

Therefore, based on the above-mentioned factors, there is a 70-80 percent probability that the pair shall not depreciate beyond 72.40 levels until March 2020 and the further course shall be determined based on the upcoming data and news. Therefore, any rise above 72.00 levels remains a selling zone and dips near 71.10-71.20 remains a buying zone for the next one month.

Amit Pabari is the MD of CR Forex Advisors.