The New Year has started with a bang as the rupee breached psychological 72.00 marks as the crude oil jumped following the geopolitical conflict in the Middle East. The tension between the US and Iran escalated after American forces killed Iran’s top commander, General Qassim Soleimani, in a drone strike in Baghdad. Iran then fired more than a dozen ballistic missiles against at least two Iraqi facilities hosting US-led coalition personnel. The latest events have renewed fears of war between the two countries. Because of this, the U.S. has deployed an additional 3,500 troops to West Asia.

Iran declared it would no longer abide by any restriction imposed by the 2015 nuclear deal. It would no longer limit its capacity for uranium enrichment, the level of enrichment, the stock of enriched material, or research and development. However, its foreign minister said it does not want to escalate the present situation. US President Donald Trump has also signalled that the US would not respond militarily to Iran’s attacks on American forces in Iraq. Any further escalation of tension between the US and Iran may have huge ramification on crude-oil prices.

Now markets are awaiting details of the trade deal between the US and China. US President Donald Trump has recently announced that Phase one of the trade deal with China would be signed on 15th January at the White House. A local media group Caixin recently quoted senior agriculture official Han Jun that China will not increase its annual low-tariff import quotas for corn, wheat and rice to accommodate stepped-up purchases of farm goods from the United States. Since the U.S. presidential election is scheduled for November 2020, hence, to garner support Trump will be more aggressive and unpredictable.

On the other hand, India’s macroeconomic picture is becoming uglier. CPI continued to rise to 5.54% in November on account of higher food prices following uneven weather patterns in most part of the country. The industrial production also contracted sharply indicating a broader slowdown in the economy. The government has projected that the economy is forecast to grow at its slowest pace in 11 years in 2019-20 by 5% in 2019-20, from 6.8% in the previous year. In April-November, fiscal deficit has increased to 114.8% of the budgeted target for the current fiscal year. There is a concern that India’s fiscal deficit may widen to 3.7-3.8% in the current fiscal year, from 3.3% target.

However, the current account deficit has narrowed to $6.25 billion in the quarter ended September 2019, from $19.03 billion in the corresponding period last year. The RBI kept the repo rate unchanged in the monetary policy meeting last month due to higher inflation. The recent spike in the crude oil prices has also raised upside risks to inflation. Hence the RBI may keep interest rate unchanged in the next monetary policy meeting. The focus will now also shift to the Union Budget to be presented on 1st February. Overall, the outlook of the rupee is bearish in the short term.

Technicals

On the weekly chart, USDINR currency pair, after giving a breakout above a ‘Downward Sloping Trend Line’, price retraced back and arriving at important support near 71.20-71.40. The price has given close above the bearish ‘Ichimoku Cloud’ which indicates bullishness in the counter. Also, the price has started to trade on the positive side of ‘Parabolic SAR’ indicator adding more support for the upside move. However, the currency pair will face immediate resistance around 72.30 which can cap the bullish movement. Once the price breaks above the 72.30, we may see the strong upside rally towards 72.70 and then up to 73.40. On the downside, a very strong support zone is showing around 71.40-71.20 which can hold the price from falling further. In the immediate term, the price may trade within the range of 71.20 to 72.30 and continuation of the uptrend will be seen above 72.30. For a next 2-3 weeks, we maintain our sideways to bullish view on USDINR currency pair.

Author: Mr. Rushabh Maru, Research Analyst – Currency & Commodity (Investment Services), 9th January 2020

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