India rupee tests strong technical support, could fall to last year's low of 65/dollar

The Indian rupee, after seeing its sharpest intra-day fall in more than a year on Monday, has been holding near the key support line of 63.50. On Tuesday, the rupee gained slightly helped by some weakness in the dollar.

An IBTimes UK technical analysis last week had placed the near term target of USD/INR at 63.50. On Monday, the pair rose to as high as 63.675, its highest since last September, before settling at 63.56.

"This kind of a fall was not expected, to be frank," the main forex trader at a state-run bank who does not want to be identified for bank's policy reasons, told IBTimes UK.

"The market will expect the central bank to do something in situations like this to reduce volatility of this degree," said the Mumbai-based dealer.

The dollar/rupee pair slipped to 62.80 in early trades on Tuesday but bounced back above 63.50 later in the day.

The charts now show that the USD/INR pair could see some downward correction within the upward channel but as long as the 62.0 support holds, chances of hitting 65 level are high for the near term.

According to some interbank traders in Mumbai, likely central bank intervention and profit-taking on dollar longs will aid a corrective decline in the pair in the coming days but upside risks will not fade away until falling below the 62-mark.

The Reserve Bank of India has clarified its stance on intervention in the currency market several times saying it will do it only to prevent sharp volatility in the market and not aiming a certain level in the dollar/rupee exchange rate.

The sharp decline in crude oil prices has led to widespread risk aversion in Asian markets over the past few days. The WTI crude for 15 February dropped to a new multi-year low of $54.34/barrel on Tuesday, making a 3.4% decline on the day before edging back to $54.65.

The BSE Sensex, India's main share index, had hit a record high of 28,822 on 28 November making a 36% rally since 2013 close but has been falling since then. So far in December, the index has fallen more than 7% reducing the margin of the yearly rise to 26%.

In the first five months of the year, the rupee saw upsides, and with an over 6% rally, it hit an eleven-month high of 58.23 in May. The Indian currency then began reversing the gains and until date, it has dropped more than 8% from the May peak. From end-2013, it is now trading 2.6% weak.

All attention is now on the Federal Reserve policy review on Wednesday and oil prices. Any additional signal from the US that dollar liquidity will get tighter sooner than earlier expected will worsen the rupee selloff in line with its peers in the region.

The Malaysian and Indonesian currencies too had fallen to new multi-year lows against the dollar on Monday.

Technical analysis

The USD/INR is now testing the upside barrier of an upward channel since June and a correction within the channel can push it down to 62.0 in the coming days.

In case of a bounce-back there inside the channel, the pair could get back above 64 and hit 65.0, the 61.8% Fibonacci retracement of the August 2013-May 2014 selloff in the pair.

Further north, 66.0 and 67.0 and 68.90 will be some levels to watch ahead of new record lows for the Indian currency.

In case of a break below the 62.0 mark, the pair will aim 60.87, the 23.6% line also endorsed by the 50-period moving average on a weekly chart.

Further on the downside, 60.18 and 59.60 are two levels to watch ahead of the May low of 58.23.