Risk sentiment recovers heading into FOMC tonight
|Global risk sentiment has recovered overnight despite the death toll from Coronavirus rising to 132 from 106.
Today is the US Federal Reserve rate decision. The FOMC is expected to keep rates unchanged. It may lower the IOER (Interest on Excess Reserves) to ensure that the overnight Federal funds rate stays at the lower end of the targeted range. US Fed's purchase of treasuries is likely to continue until Q2. The balance sheet expansion is intended to impart USD liquidity into the system and balance the money markets. However, it is being viewed as QE by several market participants. If the Fed highlights a weakness in manufacturing and business fixed investment and sounds dovish, we could see the US Dollar give up some of its gains. Indication of rates remaining on hold for a prolonged period would be positive for EM assets and risk in general.
Today is the Jan series currency derivative expiry. We may see some USD selling at RBI fix. Month-end exporter selling could cap upside in USDINR intraday.
Likely range 71.10-71.40 with sideways price action.
US and India are expected to sign a USD 10bn trade deal in February. This is being seen as a first step towards a free trade agreement between the two nations.
Strategy: Exporters are advised to partially hedge around 71.45 levels. Importers are advised to cover on dips towards 71.15 levels as we are nearing event risk i.e. Budget 2020. The 3M range for USDINR is 70.00 - 72.50 and the 6M range is 69.50 - 73.50.
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