By Gaurang Somaiya
The recent decision made by Fed was expected, the Fed raised its rates by 25bps, while the ECB followed suit with a similar increase but a peak is now clearly in sight and the debate is set to shift to how long rates will need to be kept at current levels. Additionally, the BoJ chose to maintain its ultra-loose interest rate policy but pledged greater flexibility in its yield curve control approach.
Following the Fed’s decision, the dollar experienced profit booking against its major crosses. The dollar in the last few sessions has witnessed profit booking against its major crosses as investors are forward looking and are discounting that the Fed will look to take a pause for the rest of this year. Dollar Index YTD returns are almost flat as Bulls and Bears remain divided between the Fed’s Hawkish Pause and recovery in the US economy. As far as rupee is concerned, it remains quite resilient and that is because RBI continues to intervene to keep the volatility in check. Recently, RBI data showed reserves has risen to $609 billion in its kitty to curtail the volatility and use this reserve at times of uncertainty.
The commodities market responded positively to the central banks’ actions, witnessing gains in safe-haven assets like Gold and Silver, along with other commodities such as Crude, Copper, and Zinc. Fear of a global growth slowdown has receded slightly, bolstering industrial metals. However, the sentiment of an impending rate hike continues to pose questions about a potential softer landing. As major central banks adopt a data-dependent approach, volatility is expected to increase in the coming weeks, impacting global currencies and commodities. Economic data from these economies will be a key driver of policy decisions.
We expect that major currencies are likely to witness volatility in the coming few weeks and swings in the currencies and commodities will be driven by economic numbers that come in from these major economies. Higher volatility in the Dollar Index is also hampering the move in Commodities; from the lows of ~99.60 recently we have seen a decent up-move towards 102 mark, if this up-move continues we could see gains for metals being capped. We expect that unless the dollar remains under the 103.50 -104.00 zone the bias will be marginally negative.
(Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)