Rupee in long-term bullish formation against dollar

The long-term chart of the Indian rupee-US dollar (INR-USD) pair is forming a bullish pattern, even as it continues to lag in the short term. A confirmation of the bullish pattern can take the INR substantially higher.

In the short term, INR has exhibited relative weakness against the US dollar. In April 2011, INR touched its November 2010 high of 0.0227 and reversed. The dollar index, on the other hand, touched a low of 75.60 in November 2010 and made a new low in May 2011 at 72.60. The fall in the dollar, however, did not push the rupee higher, indicating short-term weakness in the Indian currency.

However, a step back to the long-term picture shows the INR-USD pair forming an ascending triangle since April 2010. The INR level of 0.0227 is the resistance area stopping a rally. It was hit thrice, once in April 2010, then November 2010 and finally in April 2011. However, each progressive fall from the 0.0227 level has been shallower. This essentially means that the INR has, since April 2010, made equal highs but higher lows.

A higher low is when the latest low in prices is higher than the previous low.

When chartists draw a straight line on the equal highs and an up-sloping trend line connecting the higher lows, it forms an ascending triangle. An ascending triangle is considered a bullish chart formation and once it breaks out of the high, which is 0.0227 in the case of the rupee, prices can zoom higher. A breakout can take the rupee to 0.0237, which should be first profit target for longs. Once that level is cleared, INR can run all the way up to 0.0251.

In the short term, INR faces headwinds from the rallying dollar. The dollar index, which measures the greenback against six major currencies, hit a low of 72.60 before rallying recently. Based on the price action of the dollar index, it is felt that the greenback has some more to rally. This will put a downward pressure on INR.

On a fundamental level, the long-term outlook remains uncertain due to high inflation. Despite hiking interest rates to curb inflation, the Reserve Bank of India has not been very successful. A rising interest rate is good for the value of the currency, but inflation in India is negating the positive rate impact on the rupee.

If the rising interest rates head off inflation, it will be great positive for INR. Charts often reflect the opinion of a majority of market players. The currency markets believe that India will lick inflation and that the economy will continue on its growth path. This is seen in the long-term charts of the rupee, where prices are making higher lows. A market making higher lows simply shows that buyers are willing to higher prices for an asset class. Hence, based on the charts alone, we’d be bullish on the long-term prospects of the rupee, even though one can make quick profits on the short side.

Dollar index
The index retreated slightly last week after a strong rally up. We feel this is just a correction before the index rallies again. However, right now, the dollar is in a no-trade zone. It’s best to wait for a correction to the 74.50 level before going long. Traders wanting to take quick profits on the short side should wait for the index to hit 76.25 to 76.50 range before taking positions. Unless the dollar index reaches any of these two levels, it’s best not to take any new position.

However, quite a few investors are long dollar from the 72.60 level. They should move their stop loss to 74.20 to lock in profits.
The writer is editor, www.capturetrends.com and based in Chicago.