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Rupee trading below 20 and 50-DMA; likely to weaken towards Rs 71.50/USD in near term.

Date: 27-08-2018
Subject: Rupee trading below 20 and 50-DMA; likely to weaken towards Rs 71.50/USD in near term
The falling rupee could play spoilsport for those who wish to travel abroad as it would hurt their pockets. However, the recent depreciation in currencies of emerging markets can be good news as travellers would get better exchange rates and intern afford more luxuries.

Amid all the news of a selloff in the Turkish lira, which is down 60 percent against the dollar, Istanbul seems to be the best destination to head to at present.

While the above is one aspect of a falling currency, the lira has caused ripples across markets with investors running for cover as the contagion sell-off spreads to other emerging market.

The plunge in the lira was on the front burner due to fears about the economy and disputes with the US. Hardly any emerging-market currency was spared over Turkey’s crisis; the South African rand and Mexico’s peso were among the most affected.

The Indian rupee too felt the brunt and breached the psychological Rs70/$ mark for the first time. While there were plenty of catalysts already for rupee's free fall like concerns over a global trade war, rising US interest rate scenario, surging crude oil prices, widening CAD, but the recent and the most swift blow came on account of the Lira effect.

While all of the above lead to a domino effect, but we still have another major culprit in the form of a weakening Chinese Yuan.

Since the beginning of April, the yuan has fallen around 10 percent against the dollar amidst trade war with the US, but this depreciation has certainly taken some of the oomph out of the trade war.

The fall in yuan somewhat offsets the effect of tariffs on Chinese exports. However, if the yuan continues to weaken further it may create waves of volatility in the forex space sending ripples towards the Indian rupee.

The rally in dollar index that started from April 2018 has been another prime factor for rupee’s slide. With US core CPI at 2.4 percent and growth in good shape, the US Fed is likely to be on the trajectory of monetary tightening, pushing the dollar index higher and weighing on the Indian rupee.

On the domestic front, the RBI has been selling dollars to contain the rupee fall and since April the forex reserves have fallen by a good USD 25 billion to around USD 400.88 billion, almost 5 percent.

During this period, the rupee has fallen by 5 percent and the US dollar has risen by a good 6 percent since April.

The rising crude prices have made matters worse for us. India is dependent on oil imports, the rising crude prices have widened the current account deficit (CAD).

The growth in imports touched a 14-month high of 28.8 percent in July to USD 43.79 billion. Exports growth slowed and touched 14.3 percent in July to USD 25.77 billion.

This rising trade imbalance would burn a hole in our current account deficit. The current account deficit may worsen to around 2.6 percent of GDP this fiscal due to higher oil prices and a falling rupee. A higher CAD will further weigh on the Indian rupee.

On the technical front, rupee’s declining trajectory has sent the rupee bulls into hibernation. The rupee is trading well below its 20 and 50-day moving averages.

The break of its earlier support of 69.20, which now poses as a strong resistance, has skewed the risk towards a move lower in days ahead. The immediate resistance for rupee is seen at 69.50 followed by 69.20 mark.

The charts on longer time frame are suggesting a negative bias, and after a small pullback, the local unit will again take the declining path and eye 70.90 and a close beyond that will take it towards 71.50 levels.

With the US economy growing steadily, accompanied with rising inflation, and correspondingly higher interest rates, US is more likely to continue its monetary tightening. Further given the rising CAD in India, the pressure will remain on the rupee.

The global headwinds could continue to blow, be it the trade wars or a Lira like a crisis. Looking at the various factors, it appears that the torrid time is still not over for the rupee and post a small breather, the rupee will eventually weaken towards 71.50 levels.

Disclaimer: The author is AVP- Retail Research, Religare Broking Ltd. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Source: moneycontrol.com

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