Market Analysis by Abhishek Goenka, “Fed obliges the president; cuts rates to zero”

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Just three days before the policy, the US Fed has cut overnight Federal funds rate by 1% to 0-0.25% range.

It has also announced USD 700bn worth of QE i.e. purchase of USD 500bn on US treasuries and USD 200bn of Mortgage-Backed Securities. The Fed has unleashed its entire arsenal in one go.

The markets were concerned about the widening FRA-OIS spread. The humongous liquidity injection is intended to tackle that. The Fed has also lowered the emergency borrowing facility for banks by 150bps to 0.25%.

It has cut Reserve Requirements to zero and has announced swap lines in coordination with other major global central banks to lower the cost of USD funding by 25bps.

The panic reaction of the Fed accentuates how bad it sees the economy going forward. The measures announced are more expansionary than in any of the previous crisis.

The Coronavirus situation has taken a turn for the worse in Europe. US has extended its travel ban to the UK and Ireland. The lockdown also poses challenges in Brexit negotiations between the EU and the UK. This is weighing on the Pound.

PM Johnson is in a tough spot on whether to push back and extend the transition period deadline or not, adhering to which was his core campaign promise.

With Fed cutting rates and launching QE, one would have expected the USD to weaken against majors. However, Euro and Pound have not gained as much as respective domestic concerns are dominating. Flight to safety is likely to continue and this should keep the USD bid.

SGX is indicating a 3.5% cut for Nifty on open. The rupee is likely to open around 73.90. Likely range 73.65-74.15 with a downside bias.

Forwards are likely to get paid on open. We also have the RBI S-B swap auction today the response to which could be tepid given that forwards are likely to be higher in the secondary market itself.

Eur 1.1108, GBP 1.2332, Aud 0.6145, Jpy 107.02, Cnh 7.01, WTI 31.23, Gold 1545, US 10y 0.67%, US 2y 0.27%, India 10y 6.30%, Dow +1985pts, DXY 98.38.

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