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Currency 2-8 June 2016

Series of key events in the coming days can turn the currency volatile:

The reversal in the rupee from the May 24 low of 67.76 was short-lived as it failed to strengthen beyond 67.

The currency touched a high of 66.95 on Friday and reversed lower again. Even strong GDP numbers failed to boost the sentiment.

A Bengali newspaper reporting that the RBI Governor wants to go back to the US and may not want to extend his tenure has added fuel to the down-move. This news weakened the rupee from 67.10 to 67.44 on Wednesday. The rupee recorded a low of 67.46 before closing at 67.45 on Wednesday.

An eventful week
Volatility is on the cards as the week is packed with key events that can impact the rupee movement.

It begins with the European Central Bank and Organisation of Petroleum Exporting Countries (OPEC) meetings on Thursday. These will be followed by the US non-farm payroll numbers on Friday.

A strong surge in the payroll numbers accompanied by a rise in employee wages will boost the dollar. It will further increase the possibility of a rate hike in the US in June or July. In such a scenario, the rupee can fall further, to 68 or lower levels.

On the domestic front, the RBI’s monetary policy meeting is scheduled on Tuesday. There are widespread expectations of a rate cut this month. If the RBI disappoints, then it can trigger a sell-off in the equity market and pile pressure on the rupee.

Dollar outlook
The dollar index (95.55) is facing resistance near 96 and has come off slightly. While below 96, a fall to test 95, an important support, is possible. A breakout on either side of 95 or 96 will decide the next leg of move for the index.

The US jobs numbers due on Friday might be a possible trigger for this breakout. A strong break above 96 can take the dollar index higher to 96.6. Further break above 96.6 can increase the possibility of the rally extending to 98 thereafter. On the other hand, if the index declines below 95, it can fall to 94 in which case the rupee can recover slightly.

Rupee outlook
As expected, the psychological level of 67 has capped the upside in the rupee over the past week. The subsequent reversal from the high of 66.95 keeps the bearish outlook intact. Immediate support is at 67.5, a break below which can drag the rupee to 67.85 in the near term.

A strong fall below 67.85 can take the currency further lower to 68.25 in the short term. Such a fall will keep the medium-term bearish outlook also intact for a revisit of the previous lows of 68.85 recorded in August 2013.

The downside pressure on the rupee will ease only if it decisively breaks above 67.

The next target will be 66.8. If the currency manages to surpass the hurdle at 66.8, it can strengthen further to 66.5. The 66.5 level is an important short-term resistance, which is likely to limit the upside in the rupee.