USD-rupee bulls, watch out; the rupee could revive from 53

By George Albert

The US dollar-rupee (USDINR) pair broke through the 52 level which should make the bulls cautious as the turning points are nearing. It’s time for USD-INR bulls to begin taking profits as soon as the pair nears its all-time highs.

The dollar may continue to appreciate against the rupee much higher, but unless the market proves strength, it is better to be safe than sorry. Remember that the USD-INR pair went all the way to 54.29 and could reach that point again. However, the sharp decline in the pair began from the 53 level in January 2012. Hence once the pair reaches that level it could begin to fall again.

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When the USD-INR pair rallies, the dollar appreciates and the rupee falls. A fall in USD-INR one the other hand results in a rally of the rupee and drop in the dollar.

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The text books would say that the rupee would continue its depreciation as the Reserve Bank has lowered interest rates. Since the return on the rupee is lower the currency value should fall. However, the fall in the rupee was not sharp after the Reserve Bank cut rates, which makes it safe to conclude that the interest rates are having only a small effect on the currency’s value.

Usually a cut in interest rates leads to a rally in the stock markets. Even though the markets have risen there is no strength in the rally. Market players don’t seem to have much confidence that the rate cut will stimulate the economy at this point given the inflation and deficit figures. One of the key factors that would influence the value of the rupee would be foreign institutional investor (FII) inflows. As the rupee nears its lows, FIIs would find it attractive to bring money into the country which would push up the value of the currency.

Given the rapid rise in the value of the rupee from the 53 level in February, it would make sense for foreign investors to bring money into the country once the INR reaches that level. Anecdotal evidence based on reactions from non-resident Indians (NRIs) shows that there might be interest in converting foreign currencies into rupee at the 53 level. Several NRIs that this correspondent has spoken to were disappointed at missing the opportunity to invest at the 53 level in January and are likely to jump at a second chance.

The price action of the USD-INR chart has an interesting story to tell. Chartists look at what is called the impulse and correction sequence. The impulse is generally considered the direction that the market wants to take. For instance, if it takes a stock one day to fall by Rs 100 and three or four days to recover by Rs 100, the impulse of the market is down.

It took one month from January 2012 to 3 February 2012 for the rupee to appreciate against the dollar from 53.20 to 48.61, but took from February 3 to now to depreciate from 48.61 to 52.08. This price action shows that the rupee is very cautious while depreciating but robust appreciating, which is good news for the rupee. The theory is that once the rupee reaches the 53 level it could quickly start appreciating again.

**Sensex Update:**In last week’s article we had mentioned that the Sensex and Nifty were in a bearish pattern. ( Click here for Sensex chart ) If the bearish pattern was confirmed by a close below the gap, we said that the Sensex could fall about 1,000 to 1,500 points. We had also mentioned that if the prices broke above the triangle the bearish pattern was no longer valid.

Last week the Reserve Bank’s decision to cut interest rates pushed the Sensex above the triangle’s downtrend line. This makes the pattern invalid as well as its downside targets. It does not mean that the bear trend of the past two months is over. One could still see the markets fall, but prices have to close below the gap first. On the upside Sensex faces resistance at 17,700 and 18,100.

George Albert is Editor, www.capturetrends.com