Reported By:
| Edited By: Bhaskar Panda |Source: DNA |Updated: Jun 26, 2017, 07:35 AM IST
The speculation for a US rate hike was rife before the Federal Open Market Committee (FOMC) meeting. FOMC not only hiked US interest rates by 25 basis points (bps), but also showed exemplary patience while noting, “inflation on a 12-month basis is expected to remain somewhat below 2% near term but to stabilise around committee’s 2% objective over the medium term.” More importantly, FOMC also stated that, “the committee currently expects to begin implementing a balance- sheet normalisation programme this year, provided the economy evolves broadly as anticipated.”
The significance of this far outweighs anything else and the yields would start reacting once the time frame is a little certain. One has to bear in mind that the US Federal Reserve (Fed)’s balance-sheet had expanded from around $480 billion in 2009 to more than $2.4 trillion today.
A mature global market has not overreacted to this news compared to the “taper tantrum” of the past.
In any other day, this news would have had a chain reaction which would have affected the US dollar yields and its movement. However, the Dollar Index has not moved much which indicates a different story.
Historically, Dollar Index had captured US rate adjustments far ahead then others. Probably, that’s now playing out now when US Fed is expected to gradually move interest rates up and at the same time start paring it’s huge inventory of securities.
Technically speaking, the Dollar Index’s fall had halted just before the important Fibonacci level at 96.42 on weekly charts. Right now, it’s boxed between 97.83 and 96.42 and I don’t expect any immediate breach on either side.
Looking at the weekly chart, one may be tempted to say the downward pressure has subsided and there is an increased likelihood of the index moving higher.
Great Britain is in a kind of flux, hovering between “Brexit” negotiation worries, weak Great Britain pound (GBP)-induced industrial recovery as evidenced by British factory orders (at a 30 year high) and increasingly hawkish Bank of England (BOE) Monetary Policy Committee (MPC).
The hawkish comments from Andrew G Haldane, chief economist, BoE, after a rather dovish disposition of governor Carney had brought the focus back on GBP.
While, technically speaking, GBP/USD pair has been moving within the cloud on weekly charts with a rather bearish bias. We could see the pair move towards 1.2526 before finding solid support.
In India everyone had been anticipating a rate cut on the basis of weak Consumer Price Index (CPI). The Reserve Bank of India (RBI) MPC kept key policy rates unchanged against such a back ground.
However, one of the members of the MPC had voted in favour of a rate cut. Hence, wait was then for to get a sense from the minutes of MPC.
Ravindra H Dholakia, who is one of the members of the MPC, had noted, “there are several noteworthy developments recently on prices and output fronts that warrant a decisive policy action by the MPC. This is the most opportune time for the MPC to effect a major cut of 50 basis points in the policy rate to bring it down from 6.25-5.75%. ”
Having said this, we can see from the thought process that, future RBI policies might be aimed towards maintaining long term inflation around 4%. Hence, future rate cuts would be exceptions than the rule.
Meanwhile, the trade data shows that we are running a deficit of $13.84 billion for the month of May 2017.
While the physical exports grew at 13.83% year on year (yoy), corresponding growth in imports were stronger at 40.63% yoy. The sum total of all these background information coupled with movement in rest of the world, has reflected on range bound movement in USD/INR.
The USD/INR currency pair is now expected to trade within a range of 64.3000/8000 for some time to come.
In summary, we expect the Dollar Index to consolidate at higher range while USD/INR will continue to maintain its staid range for some time.
The writer is senior regional head - treasury advisory group, HDFC Bank
