USD/INR: Entering Crossroads

The Indian Rupee traded sharply lower following USD weakness overnight. If RBI hasn’t done so, a thank you note is certainly in order from Governor Rajan to Ben Bernanke for the FOMC’s stay of hand with regards to QE tapering. The new Bank of India chief was widely expected to scale back some of the tightening measures made by his predecessor in favor of promoting economic growth. This will almost certainly result in Rupee weakening, but Rajan will have less to worry given the amount of buffer that has been afforded to him due to the latest development.
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From a technical perspective, prices is creeping back into the ascending channel, which opens up Channel Bottom as a plausible bearish target. However, long-term trendlines tend to be imprecise as a small difference in gradient can result in huge difference in terms of price levels. As such, it is important to look for further confirmation that a breach is actually occurring. In this regard, Stochastic readings actually support such a move, with readings showing that we are mid-flight within a bearish cycle. However, it is unlikely that we will be able to hit Channel Bottom within this bearish cycle as the gulf is wide with only half a cycle left. Furthermore, we have various Fibonacci support levels lying in wait, with the most prominent one being the 50% Fib retracement which is the confluence with 2012 Jun highs.

From a fundamental perspective, it should be noted that Governor Rajan has purposely shifted his maiden monetary policy announcement from Wednesday to Friday. The reason for doing this is clear: waiting for Fed to show their hands before he show his. Prior to Fed’s announcement, analysts were expecting a 50/50 chance that Rajan will cut the Marginal Standing Facility rate, but this probability has definitely increase due to the scope afforded by weakness in USD. If Rajan does ease, there is a chance that Rupee will rebound off the Channel Top and move towards August highs once again.

Ideally, RBI should wait for Rupee to to push further lower before introducing easing measures. With Rupee confirmed below the Channel Top, there will be technical bears helping to keep USD/INR rallies under check. This flow is definitely not huge, but may help to make the difference as an improving Indian economy will help to prevent outflow of foreign funds and hence limit the weakness in Rupee. Hence, having technical bears to keep INR weakness in check may be the lifesaver before the broad economy recovers. By announcing easing measures too early, Gov Rajan may undermine Rupee too early and result in higher inflation, undoing the good works he’s trying to do for the economic recovery.
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Short-term wise, it is interesting to note that yesterday’s decline has failed to even touch the bottom of the wedge, suggesting that current bearish momentum is in no way overextended. This is good news for USD/INR bears who are still aiming for some further downward movement. However, with Stoch readings entering Oversold regions with past few hours trading flat, we could potentially see yet another rebound higher. But this rebound does not necessarily invalidate current short-term bearish pressure, and we could see bulls faltering before Wedge top is tagged, with 62.40/16th Sept swing low able to provide resistance.

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