EM currencies including Rupee likely to trade with a cut against Dollar, explains Amit Pabari of CR Forex

The outcome of the most-awaited meeting is here with us. The US Federal Reserve in their final meeting of 2021 turned very hawkish as widely expected in the market. 

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To tame down the impact of the four-decade high inflation, the US Fed finally accelerated their tapering plan from $15 billion to $30 billion and is expected to wind up the same by March 2022 versus the earlier deadline of June 2022.  

Amit Pabari, Managing Director and founder of CR Forex, highlighted that the fresh Dot Plot has been remarkable, where 12 out of 18 policymakers see 3 rate hikes next year which is far more aggressive than September.

Traders lifted the amount of interest rate increases by the US Fed for 2022 up to 73 basis points (bps). For the year 2023 also, the Dot Plot signals another 3 rate hikes.

The new economic projection suggests an upward revision in inflation and growth and a downward revision in the unemployment rate for the upcoming years.

Now, let’s talk about the impact of very hawkish policy on the global markets and rates. As expected, the US Fed delivered their policy, but still, long traders on USD seem unhappy as the US dollar index corrected to 96.20 after making a high above 96.90 levels.

Surprisingly, the US market took it positively, and major indices managed to trim early losses and post modest gains with the news. Probably, this led safe-haven demand out of favor.

Other reasons for the fall in the US dollar index could be Fed’s cautious tone amid the risk of the Omicron variant or there is a possibility that a very hawkish tilt was already discounted in the market.

When the policy was announced, traders rushed to wind up their extra-long dollar bets ahead of the year-end. Other FX were seen gaining momentum on a fall in USD.

In the commodity pack, gold and crude oil prices too jumped higher. Asian markets were seen trading on a positive note, following a higher closing on US bourses.

In the bond market, the US Yield curve further flattened out as a 2-10-year yield spread fell to almost 70 bps- its lowest level since Dec 2020.

As long as the US growth story is brighter, we could see the US dollar index heading higher towards the 100 mark in the New Year.

On a relative basis too, a gloomy outlook on Eurozone and UK could also help USD to remain on a bullish note.

Heading into a new year, the market participants will closely track the US economic data, inflation figures, job reports and will build further higher expectations on the Fed policy.

The way FIIs/non-resident investors (NRI) have ignored their investment strategy in Emerging Markets (EMs) over the last 2 months suggests a shift in the investment dynamics in 2022 from EM to the US.

Hence, EM currencies are likely to trade with a cut against the USD. However, those central bankers who have piled up their FX reserves will surely use their kitty and control the losses.  

In the case of India, the Reserve Bank (RBI) is yet to jump into the forex market and control the depreciating move.

It will be watchful from which levels they intervene and how much they are able to do it. Overall, the expected short-term range for the Rupee is 75 to 76.50.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)