US dollar receives a pre-FOMC tailwind

US dollar eyes FOMC meeting

The US dollar had a mixed session overnight, falling against the risk-sensitive Commonwealth currencies but rising mostly versus the majors, with the dollar index creeping slightly higher to 90.84 overnight. Gains were most notable versus the euro and the Japanese yen.

In Asia today, the US dollar has strengthened more broadly across the board against the majors, Commonwealths and Asian regional currencies. Like equity markets, it would appear that Asian investors are happy to reduce exposure ahead of the FOMC as a precaution against any unexpected surprises in Fed guidance. That means unwinding some of the previous US dollar shorts the world has put on through April. In all likelihood, and assuming no Fed surprises or a move higher in US yields, the US dollar should resume its retreat on Thursday.

The Indian rupee continues to make a comeback despite the dire Covid-19 situation, which sent the currency spiralling lower last week. Having risen to near 76.00 last week, USD/INR has fallen to 74.812 this morning. Indications that cases may be peaking in Mumbai and New Delhi has spurred a rush of hot money back into the India recovery play. Whether this is premature optimism helped along by some subtle intervention by the central bank, it is too soon to tell.

In the bigger picture, USD/INR staged a massive upward breakout of its one-year downtrend line at 74.00 in early April, after the Reserve Bank of India announced a formal quantitative easing programme. USD/INR had fallen back to 74.30 before Covid-19 exploded in India, which remains a crucial pivot level, even if India’s situation improves rapidly. Investor’s risk appetite will have to accelerate notably from present levels to unwind the QE discount they built into the INR price after the RBI announcement.

India’s travails aside, I expect Asian currencies to trade modestly to the weaker side ahead of the FOMC meeting. That weakness could accelerate if the Covid-19 situation in Thailand, South Korea or Japan takes a sudden turn for the worse.

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