TheFed,MarioDraghiandKingDollar

The FOMC’s decision is out and it is not a surprise. The benchmark interest rates have been kept near zero which was where it was taken on March 15^th. The important statement though came from the Fed Chief, “ We are committed to using our full range of tools to support our economy in this challenging environment.”

Readers would remember that the statement has some shades of the historic one made by the erstwhile ECB Chief Mario Draghi in 2012. The Eurozone economy in 2012 was in the throes of getting disintegrated with the debt crisis making the yields of certain economies soar to the stratosphere. Every one doubted that the ECB will be of much help. Draghi famously said “Within our mandate, the ECB is ready to do ‘whatever it takes’ to preserve the Euro. And believe me, it will be enough.” The verbal intervention resulted in the yields of the distressed sovereign debt coming down and finally the Euro found its footing.

It remains interesting to draw an analogy with the Fed when it says that it will use the “full range of tools”. The markets are convinced that the Fed will continue doing whatever it takes to keep the market afloat, as in its own assessment, the Fed has concluded that the virus impact is dire and there is no way out apart from keeping the liquidity gates open. The only problem with this approach is that once someone is used to it, it becomes difficult to let go. Colloquially speaking, it is easy to ride the tiger but difficult to dismount.

Equity markets are trading in green post the Fed announcement. The Dow Jones ended up by 0.6% by the day’s close. The Hang Seng is up by a percent in the morning trade. US 10 year yields are at 0.58, mostly unchanged.

The dollar index is trading at 93.38 which is close to a 2 year low. Some more light on the dollar index will be instructive here because the assessment that this is a broad-based multi-year dollar weakness is somewhat misleading. The dollar index is an artificial construct measuring USD performance against six major currencies like the Euro, Pound Sterling, Yen, Cad, Swedish Krona and Swiss Franc. The weighting of the Euro happens to be close to 58% in computation of the index. If we compare dollar performance to emerging market currencies since the beginning of the year we get a different picture. At the start of 2020, the INR was trading at 71.40 compared to 74.85 currently. Similarly the Turkish Lira and South African Rand have also depreciated significantly against the dollar. Hence the illusion of greenback weakness has been created by a surprise rise in the Euro which has appreciated close to 5% during this month itself and is having a dream run. The simple point being that the talk that the reign of king dollar is over is premature to say the least.

The next important event on the horizon to watch out for will be the contours of the next version of the pandemic relief program. Any figure northward of the democrats’ proposal will provide further fillip to equities and risk assets across the world.

Domestically, the rupee is trading at 74.85 and the 10 year yield is trading at 5.83. The announcement by RBI of bringing a new 10 year benchmark in the upcoming Friday auction had resulted in hardening of yields on the 5.79% 2030 bond on Tuesday, yields of which went up till 5.87 but it has stabilized now. Friday auctions will see the auction of 18000 Cr INR worth of new 10 year bond. The bond market is also wary of extra borrowing on account of the shaky fiscal position of the government. News around the suggestion that the GST council might end up accessing the market to borrow to compensate states for revenue shortfall is not good news either.