Rupee must breach November high to rally higher

The charts show the dollar index picking up a strong bullish trend, indicated by what professional market players call an impulse and correction sequence.

Note that the rally in dollar index is just a correction to a long-term bearish trend. The bullish impulse and correction sequence is essentially prices moving up very fast and then correcting or moving down slowly, only to make more, faster upmoves. In the case of the dollar index, the corrections after the rally have not resulted in the index falling much but going sideways. This price action is extremely bullish and can carry the greenback higher over the next few weeks.

We had earlier called for going long on dollar and shorting commodities such as gold, silver and oil. The dollar index had reached a strong support level of 73 by the end of April and consolidated 72.70 and 73 for a few days. After it broke out of the consolidation, prices rallied strongly. We believe that a strong rally was driven by a lot of short covering. As the dollar index was nearing its support level, there was a lot of negative greenback news. This must have prompted bears to go heavily short on the greenback and once the dollar rallied, the bears had to cover, driving the index up. Additionally, as the dollar had sold off for quite some time, the rally in price is not surprising.

The dollar is in a strong long-term bearish trend. A few months back, the index broke out of its six-year consolidation to the downside, indicating that the greenback was headed lower. The final target is expected to be 60 on the index and it closed at 75.76 last Friday.

We would be looking for areas to short the dollar after it rallies some more to get on board with the long-term bearish trend. For the short term, it’s ok to go long on the dollar. There are quite a few resistance levels on the dollar, which can either reverse this rally or slow it down. The resistance levels on the dollar index are 76, 77.25, 78.80 and 80.85. Not only are these levels of resistance in price, but other indicators also confirm that these levels have good supply, which can push prices lower.

INR-USD
The rupee continues to exhibit relative weakness against the US dollar. In April 2011 INR touched its November 2010 highs 0.0227 and reversed. The dollar index, on the other hand, touched a low of 75.60 in November and made a new low in May at 72.60. The fall in the dollar should have pushed the rupee above its November high, but it did not.

This has analysts puzzled. Not only is there bad dollar news, but there is good rupee news, as the Reserve Bank of India has been hiking interest rates. Higher interest rates usually push up the value of the currency, but not so in the case of the rupee. We believe a sluggish performance of the rupee is due to the high inflation in India, resulting in negative real interest rates.

On the technical front, the rupee has to break above its November 2010 highs with strength to rally higher.

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