Rupee may fall further if 46 level is broken

The rupee rose against the US dollar last week to the 45.5 level from 46 per greenback, as predicted in our previous article.

The 46 level was an area of excess dollar supply and had led to a sell-off in the greenback on November 29.

The dollar-rupee pair (USDINR) has been on a steady uptrend since early November only to be stopped by the excess supply of dollar for the second time at 46 last week.

The chart pattern of the pair shows that the buyers are soaking up the excess supply and the pair could rally higher if the 46 level is broken.

The next strong level of excess supply is 47. One of the reasons for the USD-INR’s inability to rally further is the fact that the dollar index has been in a downtrend. Even though the rupee is not a part of the dollar index, it does
have an effect on the Indian currency.

Dollar index
Let us look at the dollar index before we move forward. The steady downtrend in the dollar index was broken last week when it caught a bounce at the 77 level to rally up to 78. This is the first major bounce since the index began its sell-off on January 10, 2011. We believe that the strongest demand for the dollar is at the 75.75 to 76 level and that the current bounce is just corrective before the index moves further down.

In last week’s article we had mentioned that the greenback was in whipsaw territory and we would wait for the index to hit the 76 level before going long.
The currency bounce is not from a significant demand level, making the rally suspect. People short dollar from the resistance level of 81.25 that we had mentioned in previous articles can now move their stops down to the 78.50 area to lock in profit.

Last week’s rally is good news for dollar bulls as it shows that the demand for the greenback is back in play. Now a drop down to 76 can produce a nice rally given the buying interest.

Dollar-Swiss franc
Along with the dollar index the USD-CHF pair also rallied over 300 pips last week. If the pair closes above 0.98, it can reverse its long downtrend. In fact the pair bounced last week from the January lows but the rally this time around is much slower than the rally of early January. This does not bode well for the dollar bulls.

However, traders long from the 0.9325 level can move their stops to the 94.25 area.

Remember that both the dollar index and the USD-CHF pair are in a downtrend and any bounce could be temporary. We would be more comfortable going long this pair if the dollar index touches 76 and the pair itself reaches support.

Euro-dollar
The rally in the EUR-USD pair stalled as the dollar index stopped falling last week and rallied. Traders expected the pair to rally after the breakout but did not do so due to the strength of the dollar index.

The price action of last week has created a new resistance level between 1.3835 and 1.3865. It is the level where we would take a short position. If that level is broken the next level of resistance is the 1.42 area.

The writer is editor, www.capturetrends.com, and is based in Chicago.