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The Federal Reserve’s dovish stance is expected to prop up EM Asian currencies when the 2019-nCoV outbreak shows signs of stabilization in the next one to two weeks, according to the latest research report from Scotiabank.
The Fed voted unanimously to maintain the target range for the fed funds rate at 1.50-1.75 percent, expressing confidence about the economy’s health in its post-meeting statement. The FOMC judged the current stance of monetary policy is appropriate to support sustained expansion of economic activity.
As many had expected, the Fed lifted IOER from 1.55 percent to 1.60 percent to ensure the fed funds rate to move up a little bit and raised its reverse repo rate from 1.45 percent to 1.50 percent.
In addition, the Fed downgraded its assessment of household spending, saying it has been rising at a moderate pace rather than a "strong" one in the December statement, but reiterated that business fixed investment and exports remain weak.
Fed Chairman Jerome Powell said at his post FOMC press conference that the Fed is "not comfortable with inflation running persistently below our 2 percent symmetric objective." Powell noted that the 2 percent goal is "not a ceiling," suggesting the US central bank will allow price gains to rise above that level.
The dollar/yuan will likely stay below 7.00 as China’s central bank is expected to defend the yuan exchange rate amid hovering concerns over the 2019-nCoV outbreak, the report added.
In addition, a steady yuan exchange rate is needed to help stabilize A shares when China’s onshore markets reopen next Monday (3 February) after the Chinese New Year holidays, together with the PBoC’s commitment to providing liquidity support.
"EM Asian currencies will rally when the Wuhan coronavirus situation stabilizes or improves in the coming weeks. We would like to sell USD/CNH at 6.97 now with a target of 6.85 of and a stop of 7.05," Scotiabank further commented in the report.
