Rupee Gains On Weak Oil; Near-term Outlook Positive

Gurumurthy K

The Indian rupee, which was threatening to fall below 72 against the US dollar, made a sharp recovery in the past week. The currency made a low of 71.80 on Tuesday last week, and reversed higher to make a high of 71.02 on Friday. It closed at 71.17 on Monday, up 0.9 per cent for the week.

Oil dominates

The rupee strengthened in spite of the US dollar index rallying sharply by about 1.4 per cent last week from around 95.5 to the current level of 96.8. This was due to the sharp fall in oil prices, which overshadowed the impact of a strong dollar.

Oil prices continue to impact rupee movement. WTI Crude Oil prices have tumbled over 5 per cent in the past week from around $55 per barrel to the current levels of $52.3. It looks vulnerable to test $51 in the near term. Whether the WTI Oil reverses higher from $51 or not will determine the direction of the next move. A break below $51 can drag the prices lower to $50. But a bounce from $51 will increase the likelihood of oil prices moving up to $55 and $56 again.

The US dollar index (96.8) continues to remain bullish. It can move higher towards 97.3 in the near term. A strong break above 97.3 can then target 97.7 and 98 over the short term. As such, if oil price fall halts at around $51 in the coming days, then a strong dollar may cap the upside in the rupee and may see the currency weakening against the greenback.

Rupee outlook

The rupee has support in the 71.40-71.50 region. As long as it trades above this support, the near-term outlook is positive. There is a strong likelihood of the currency strengthening towards 70.90 and 70.85 in the near term. A strong break above 70.85 will then see the currency appreciating towards 70.60 and 70.45 against the US dollar.

On the other hand, if the rupee reverses lower from the 70.90-70.85 resistance zone, it can fall to 71.4 and 71.5 again.