Will seasonality play out for rupee in August?

In the current year, we have observed that the seasonality effect on rupee for resolutely seasonal months like March and May hasn’t played out with global scenario flipping haywire. As seen, March has been seasonally appreciating month and the pair have been seen appreciating 8 out of 11 years. This year as seen, the pair contradicted the trend and depreciated sharply as the world entered into a lockdown phase. Similarly, for the month of May, the rupee has been a sharply depreciating month and the pair were seen weak 9 out of 11 years. However, this year, the rupee strengthened in May flipping its historical trend as sentiments started improving when major central banks came forward with more and more stimulus to support the economy and the unlock process began all over.

If seen for August, it has been a resolutely weak month for the rupee and the pair has depreciated 10 times in 11 years. Well, will the same go for August and the pair will contradict the trend or it will follow the historical trend?

Let’s see the reasons below why the pair could follow the historical trend:

· Rebound in Dollar: Until now, a decline in the US dollar’s value and confidence of investors in parking money in riskier assets reflected optimism regarding global economic growth. From rising coronavirus cases, falling US yields, domestic turmoil, and political tensions with many countries around the world, investors had many reasons to dump the dollar. Also, sentiments are likely to remain on a weak as the new stimulus plan of US still doesn’t seem to be reaching an agreement soon. This comes at the time when the unemployment benefits for millions of Americans ended last month. All of this might lead to a crunch in the dollar liquidity from the market and thereby increasing its demand. Adding to the strength, an unwinding of short positions in the US Dollar that were accumulated since July, helped the dollar to bounce back from its prolonged weakness and the index rebounded by almost 100 pips. This led to almost all currencies declining against the dollar and if the dollar strength persists, it could weigh on rupee too.

· New tangent to US-China tensions: Markets shall remain watchful of the fresh round of worries that could escalate between the two superpowers US and China. This came after Trump said to shut the Chinese App Tiktok’s US operation unless it sells the American operations to Microsoft. To this China said it will not accept the “theft” of a Chinese technology company and is able to respond to Washington’s move, keeping the flame on.

· RBI Policy: The RBI monetary policy is unlikely to cut the rate in its August meeting as the inflation is already above the RBI’s upper mandate due to sustained supply-side constraints. Also, presently, the credit off-take is at its lowest and deposits are at its highest as people still feel there is a long route to recovery and want to hoard all they have. Hence in the scenario where the growth is low and inflation is high, RBI is likely to keep rates unchanged. Also, considering the gloomy economic outlook, stance shall remain accommodative thereby weighing on sentiments temporarily which can be another trigger for rupee losses.

Exceptions:

· Vaccine invention: With each passing day, scientists are moving closer to developing an effective vaccine. As anticipated, in the current month if any of the nation’s running the vaccine race comes out with the COVID-19 vaccine, we might see markets rebounding which can support the currencies and the trend might not play out for rupee.

· Break though in the US stimulus: If the Republics and Democrats come to an agreement on the stimulus plan and draw out a fresh package to support the economy, then we shall the rebound in the currencies.

As seen above, the dollar-rupee pair has given a breakout above 4 hourly chart trend line. This reassures that a 75.40-50 level is on the card which is also the next resistance area. The support for the pair on 21 days and 55 days moving average remains around 74.93 levels. That means if the pair sustains above 74.90-75.00 levels, there is a higher possibility of it moving towards 75.50 levels.

Outlook:

All in all, considering the seasonality, unless there is a long period of global risk aversion, upside in dollar-rupee shall be limited to 75.50-75.70 levels. Therefore any uptick arising out of the known or unknown factors is likely to be short-lived and a selling opportunity. The possibility of pair weakening near various levels for the current month is given below:

Hence, uptick between 75.20-75.50 remains a selling zone for the rupee as also the pair haven’t broken the range of 74.50-75.50 in the last one month.

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.