(As published in DNA Money, India)

August 2, 2010: The US dollar-India rupee’s (USDINR) supply zone in the 47 to 47.50 area has been hit a few times, increasing the local currency’s chances to weaken further.

USDINR bottomed in the 44 range in April 2010 and then rallied to touch the supply zone of 47 to 47.50 three times between May and July.

The more times a supply zone is hit the weaker it gets. A supply zone is an area where the number of sellers exceeds buyers, resulting in a fall when prices touch the area. Prices coming back to the supply area multiple times depletes the number of sellers, which weakens supply.

Once the sellers are exhausted, prices rise, which may be the case for USDINR.

The pair is also making higher lows, which means that buyers are willing to pay higher prices for the dollar.

A higher low is when the latest low in price is higher than the previous low in price. In the case of USDINR the higher lows began in April. First one in April was at 44.25, then in May at 45, and the next in June at 45.80 area. This clearly shows a rising trend.

Once prices break above the 47.50 area, USDINR can rally up to the 48.75 to 49 area with a pause in the 48 area. Drastic changes in the fundamentals can of course change the trend.

Euro dollar
As mentioned in last week’s report, EURUSD is facing resistance in the 1.31 area. A break of this area can take the pair to the 1.33 area.

An analysis of price action shows that the pair can break out of the 1.31 resistance area. However, a fall can take prices down to the 1.2650 area. The pair has shown strength, making higher highs and higher lows, indicating strong demand for the euro.
A higher high is when the latest high price is higher than the previous high price.

US dollar-yen
In last week’s report, we had mentioned that USDJPY was nearing long-term support in the lower 80s.

Markets operate on the principle of greed and fear. Historically, when prices fall and are nearing long term demand levels, the final bunch of bulls capitulate and sell. This leads to sharp drops in price into demand area.

The signs of capitulation are visible on the USDJPY charts with extremely strong selling pressure as prices are nearing the lower 80. Bears should be cautious as this is not a good time to short the pair.

British Pound-US dollar
The currency markets seem to like the fiscal discipline that the new conservative government brings to the UK. In US on the other hand, there seems to be no hope of belt tightening in the near future. This is reflected in the GBP rallying against the USD.

However, the charts tell us that the GBPUSD pair is nearing an area of substantial supply in the 1.5750 - 1.5850 area, which could lead to a correction. It makes sense to book some profits on the long side of GBPUSD and take some short positions.

Chart analysis

EUR-USD Chart