Rupee near record lows as dollar gains on safe-haven demand and US-Iran impasse

FUNDAMENTAL OVERVIEW

USD:

The US dollar has remained firm lately, even as a dovish shift followed comments from Fed officials Williams and Jefferson that tempered expectations for an October rate increase.

The primary factor appears to be risk-averse capital flowing into the dollar, driven by concerns over European sovereign debt. Attention has centred on France, where political instability and worries about the nation's large budget shortfall have driven French government bond yields up and the spread over German Bunds to its widest since the eurozone debt crisis.

If French spreads stabilise, some of the euro's risk premium could diminish and trigger a dollar decline, while additional widening or contagion to other economies would likely keep the greenback underpinned.

Meanwhile, US-Iran talks remain deadlocked, and with a sparse economic calendar this week, attention is expected to stay on Middle Eastern developments.

A diplomatic resolution would weigh on the dollar, as aggressive rate hike wagers would probably be scaled back. Conversely, a protracted standoff or renewed escalation would likely support further dollar strength and new highs.

INR:

On the rupee side, the currency diverged from oil prices last week, weakening even as crude markets showed little movement. Still, oil remains the primary driver for the rupee, given that India imports the bulk of its crude. A higher oil bill raises dollar demand, widens the trade deficit and puts the INR under pressure.

Wednesday brings the RBI's rate decision. In the most recent Reuters poll, 35 of 61 economists—57%—anticipated a hike, while swap markets had already fully priced one in. Expectations rose after August CPI hit 4.82%, exceeding the RBI's 4% target for a third straight month.

More significantly, the price increases are broadening rather than staying limited to a few categories. With growth remaining solid, oil elevated and central banks around the world tightening, traders expect the RBI to follow, particularly given the rupee's decline this year.

Over the near term, the rupee will continue to be driven mainly by oil prices, making the US-Iran talks key. A deal should give the INR a lift, and the USD/INR pair could fall back towards the 95.10 support fairly quickly. In contrast, a negative outcome or fresh escalation would likely keep pushing the pair to new highs.

Looking at the broader picture, the rupee remains in a bearish structural trend against the US dollar, so buyers on dips will keep seeking opportunities around strong major technical levels to drive USD/INR to fresh highs.

USDINR TECHNICAL ANALYSIS – DAILY TIMEFRAME

On the daily chart, USDINR has broken above the major resistance zone near the 96.10 level and extended gains to new highs. The natural target is the all-time high around the 97.33 level. Should the price reach there, sellers are expected to step in with a defined risk above the record highs to position for a correction to the 96.10 support. Buyers, meanwhile, will look for a breakout to add to bullish bets targeting new highs.

USDINR TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

On the 4-hour chart, an upward trendline defines the bullish momentum. In the event of a pullback, buyers will likely lean on the trendline, with a defined risk below it, to continue aiming for new highs. Sellers, on the other hand, will want to see a break lower to begin targeting a correction towards the 95.75 level.

USDINR TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1-hour chart, there is little to add, with buyers having a better risk-reward setup around the trendline, while sellers will need a break to target a pullback to the 95.75 level.

UPCOMING CATALYSTS

Today sees the US ISM Services PMI release. Wednesday brings the RBI rate decision and the FOMC meeting minutes. Thursday features the latest US Jobless Claims figures. Friday rounds off the week with the University of Michigan Consumer Sentiment survey.