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Economy Nov 19, 2011

Major currencies near strong reversal points against rupee

By George Albert

The euro, dollar and British pound near strong reversal points against the rupee, which can stop and reverse the continuous depreciation of the Indian currency. Only there seems to be no stopping the rally of the Japanese yen.

The dollar-rupee (USDINR) pair is reaching the final frontier of resistance and the INR could rally soon. In March 2009 the rupee closed at the lowest level against the rupee around 51.70, before it rallied again. On Friday the rupee closed at 51.23 very close to its lowest low. Prices often turn from previous turning points if other co-relating factors are in place. In the case of the USDINR pair the related factor is the dollar index, which is also near a point of reversal. If the dollar index falls, the Rupee rallies. The dollar index measures the greenback against a basket of six major currencies. (Click here for Dollar index chart)

The US dollar has been on a tear as investors switch to a risk off mode given the troubles of Europe. The rally which began late in October has taken the dollar index up by nearly five percent from the 74.50 level to nearly 78.50, before closing at 78.06 on Friday. Just like the USDINR pair faces reversal at the 51.70 area so does the dollar index between 78.60 and 78.83. If that level is broken the index can go up to level between 79.50 and 79.90. The next level after that is around 81.

We believe that falling rupee has more to do with the strength of the dollar than the inherent conditions of the Indian economy. Investors are looking for safe havens and hence one sees the rise in the US dollar and Japanese yen and the fall of riskier currencies such as the rupee, Australian dollar, etc.

The euro-rupee (EURINR) pair too is near a level of reversal.Reuters

Now is the time for the rupee bears to go easy. We feel the time has come for rupee bears to book profits and switch their bias to going long. However, if there is major shock in the global economy from Europe, one could see the dollar zoom and decimate risk assets such as equities and the Indian rupee.

Let us look at the dollar index chart to map the possible course of the rupee. The index closed at 78.06 and the nearest resistance level is between 78.61 and 78.83. The index could rally to its nearest resistance level which would push the rupee to its previous low of 51.70 from where both the index and the rupee could reverse. However, if the dollar index breaks above the 78.61-78.83 level, it will be bad news for the rupee.

The other majors

The euro-rupee (EURINR) pair too is near a level of reversal. For the pair the level of reversal is 69.85 to 70.85. This is the all time low level of the Rupee against the euro just like the 51.70 level is against the dollar. On Friday, the pair closed at 68.89. The fall in the USDINR could also push the EURINR down to its reversal point, which is pretty close to Friday's close.

A similar path seems possible with the British pound-rupee (GBPINR) pair. The rupee is not near its all time low against the Pound, but is still near an area of reversal. The GBPINR pair closed 80.44 on Friday and the reversal point is near 80.80. We see a lot of confluence in reversal points of the dollar index, the USDINR, EURINR and GBPINR pairs. More the confluences higher the chances of a reversal. But keep and eye on the dollar index levels. If they don't stop and reverse the rally, the rupee slide could continue.

The Japanese yen-rupee pair is marching to a different beat. The yen continues to rally despite multiple interventions by the Japanese authorities to depreciate the currency. Consequently, the rupee is not getting any relief from the yen. A broad-based reversal of the rupee against the other major could halt its slide against the yen.

George Albert is the editor of capture trends.

by George Albert

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