The US Federal Reserve said it would keep the policy accommodative until inflation moderately overshot 2% for some time. Most Fed members see the Federal funds rate at 0% until atleast 2023. Fed members see the inflation returning to close to 2% levels by 2023 and unemployment rate close to 4% by 2023. The Fed would also maintain the current pace of asset purchases of USD 120bn per month until necessary.
Though the policy is as dovish as it can get, the market was already expecting this. As we have been highlighting for a while now, a lot of the dovishness is already priced in. The threshold therefore in terms of what the Fed would have to say or do is extremely high for the US Dollar to weaken from here. In terms of impact, the US Dollar has strengthened post the policy. The Euro is now at 1.1750, the lower end of its recent trading range. US yields are almost unchanged. US equities which were trading with gains of around 1%, gave up gains post policy. Prior to the policy, US August retail sales had come in weaker than expected (0.6% MoM against expectations of 1%)
With no major surprises from the Fed policy and the US Dollar broadly stable globally, the Rupee should continue to trade the 73.00-74.00 range a while longer. While several inflows are queued up, we expect the RBI to continue accumulating reserves and that should limit down side. The Yuan is continuing to strengthen and that should limit USD strength against Asian currencies. USDINR is likely to trade 73.50-73.85 intraday with up side bias.
Bank of England rate decision is due today. While the BoE is expected to keep rates on hold, its expectations regarding pick up in economic activity will be important. Market will look for clues as to how it sees EU-UK negotiations and what would be its reaction function in case of a no deal Brexit scenario. US weekly jobless claims also due today.
Strategy: Exporters have been advised to cover on upticks towards 74.00. Importers are advised to hold. The 3M range for USDINR is 72.50 – 74.50 and the 6M range is 72.50 – 75.40.
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