Rupee rallies as dollar breaks below range

The rupee rallied last week in a show of strength as the dollar index broke below its range and hunger for risk increased.

In the column last week, we had mentioned that the dollar index could break its range
as it had touched the extremes of the range a few times.

The range for the dollar index was between 82 and 83.50. Over the past few days, the index was making lower highs, indicating a higher probability of breaking below. A lower high is when latest high in price is below the previous high in price, indicating the inability of bulls to drive prices higher.

We had also mentioned last week that the Bollinger Bands, which measure the price in relation to the 20-day moving average with two standard deviations were compressing, which often leads to a strong breakout in price. The index saw a bounce last Friday from the 80.80 area, which was a gap. Gaps are strong areas of support, which form when prices open on a trading day much higher than the close.

If prices break below Friday’s low the next areas of support on the index are the lower 80 area followed by the 79.50 area.

The dollar index has a strong influence on the rupee, which has been showing signs of further weakening for the past few days. However, once the dollar index broke below the support of 82 and the Indian stock markets rallied, the rupee gained strength. Additionally, the interest rate hike in India was bullish for the rupee. The next resistance area for the rupee is 45.81 followed by 45. Remember that the rupee’s support of 47.50 has been tested a few times and is weak.

US dollar-yen
The USD-JPY pair was a star last week as it rallied 300 pips due an intervention by the Japanese government authorities. We have been warning about an intervention for some time as the pair had rallied a lot and was in a long term support area of 81 to 84. The pair finally closed above its 20-period moving average and the average is pointing up, indicating that the downtrend may have ended.

It is, however, important to note that the rally is not due to fundamental strength in the dollar, but due to the Japanese government buying dollars. For a sustained rally the Japanese government will have to continue intervening while the other governments don’t.

Euro-US dollar
The pair broke out of its range last week and is headed higher. It was trading in a range of 1.2580 to 1.2930 for several weeks. After the breakout last week, the pair hit the first resistance area above at 1.3120 and sold off a bit, but has the potential to go all the way up to the 1.33 range. The support for the pair, on the other hand, is at the previous resistance area of 1.2930 after which it can go all the way down to 1.27. We’d also keep an eye on the US stock markets which has a strong influence of this pair. The Nasdaq futures hit resistance last Friday and sold off from the peak, which is bearish for this pair.

Australian dollar-US dollar
This pair has been relatively stronger than the dollar index and hit its 2010 high in the 0.94 area. It broke above the 94 area, clearly indicating strength last week, but could not close above it. Right now the pair is at a decision point. A close above the 94 area can take it higher all the way to 0.97, if not it can sell off and go down to the 0.91 area, before attempting to rally again. 

The 0.94 has been touched multiple times making the resistance weak, which favours the bulls. But we would wait for a pullback to buy.

British pound-US dollar
The GBP-USD pair broke out of its resistance area of 1.5530 to 1.5625, but stalled in the 1.5713 area, which is an area of congestion. If the pair can close above Friday’s high of 1.5728, it has the potential to rally all the way up to the resistance range of 1.5880 to 1.5995. This resistance area lines up well with support on the dollar index.

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