USD/INR Technicals – 54.10 resistance holding despite weaker economic data

Indian Industrial Output shrink for the 2nd consecutive month. Dec Y/Y production fell 0.6% versus 2011, way lower from analysts estimation of +0.8%. To rub salt into the wound, November production figures was revised lower from a -0.1% to -0.8%, adding misery to the ailing economy which has faced severe slowdown in 2012. USD/INR responded by moving higher to test 54.10, but ultimately INR bears were unable to break the resistance.

Daily Chart

Price is forming a shooting star candlestick pattern on the daily chart. Stochastic indicator is also hinting at a new top with a Stoch/Signal line cross. Though the cross is occurring a measurable distance shy of the Overbought region, the bearish verdict remains considering that the previous Stoch peaks are in line with what prices are showing – lower price peaks vs lower Stoch peaks. The decline from Nov 27th peak is still in force and a confirmation of 54.10 resistance will help aiding in the bearish momentum.

Bulls are still not down and out though, with current candle posting gains rather than showing a long red candle body, which would be perfect for an Evening Star setup. Based on this information, a push towards 54.10 once more cannot be ignored, but even if price does so, the shooting star bearishness will not be invalidated unless we see a close above the above mentioned level. A break higher exposes 55.85 high and may signal fresh bullishness should price break 55.85.

Weekly Chart

Longer term chart provide a mixed view, as uptrend from August 2011 lows appears to be unbroken. Bullish momentum from Feb 2012 appears to be in force as well, with price continuing to trade above the upward trendline. Stochastic reading also suggest a possibility of bottoming based on current readings. However, an alternate read will be to interpret current price peak as a top from a Triple Top or Head and Shoulders pattern, with the upward trendline acting as a skewed neckline. A conservative outlook would be simply waiting for a bearish breakout, or maintain bullish positions with tight stop losses.

Fundamentally, a weaker INR outlook fits the economic data better. However, traders seldom (if ever) follows fundamentals to the dot, and we are actually seeing the Stocks Index Sensex reaching a high of +162 points today despite the depressing economic data. Similarly, INR continue to strengthen despite the weakening economic fundamentals, mostly due to traders believing that the Reserve Bank of India (RBI) will not be able to cut rates anytime soon – keeping interest rates differential attractive especially for shorter term deposits; short-term US bond yields are falling. If this trend continues, bias will be leaning towards the downside.

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