Currency Market Snapshot For The Week
· INR depreciated by 0.34% against the USD last week and appreciated by 0.31% against the euro.
· USD rose by 0.25% on a week on week basis and is at a level of 97.85.
· British pound appreciated by 0.44% against the USD
· Euro depreciated by 0.60% against the USD.
Global Bond Market Snapshot For The Week
· US 10-year benchmark bond yields fell by 14 bps last week.
· German 10-year bond yields fell by 12 bps, French 10-year bond yields fell by 12 bps at negative 0.08%.
· Italy’s 10-year benchmark yield fell by 15 bps to 1.23%.
· US benchmark Junk bond yields rose by 10 bps to 5.18%
INR traded lower against the USD last week ahead of Union Budget 2020-21, which will be tabled in the parliament next on the 1st of February. The government is under pressure to increase spending on rural welfare schemes and infrastructure to boost growth that has fallen for six straight quarters. The spending will impact the government finances negatively keeping INR intensely volatile in fiscal 2020-21. INR depreciated by 0.34% against the USD last week and appreciated by 0.31% against the euro.
The fiscal deficit for the current fiscal year is likely to touch 3.7% or 3.8% of GDP after the slowdown dented revenue collections. The central government is expected to raise fiscal deficit to 4.5% of GDP from levels of 3.6% to 3.8% of GDP (final numbers to be in this range) for this fiscal year. Assuming a 12% nominal GDP growth, fiscal deficit at 4.5% of GDP for fiscal 2020-21 is likely to be at around Rs 10 trillion.
Total government borrowing Central plus State Governments could be over Rs 16 trillion in fiscal 2020-21, growth of over 20% year on year. On the backdrop of such a huge supply of government bonds in fiscal 2020-21, the government would have to tap the global bond market as the domestic bond market may not have the capacity to absorb the supply on its own without taking up bond yields substantially.
The exposure to the global bond market will bring high volatility to capital flows, which will keep INR highly volatile going forward.
USD ended the week higher despite the rise in the global risk aversion after the outbreak of the pneumonia-like virus (coronavirus) in China. During the week, the U.S. Center for Disease Control and Prevention announced the first case of the coronavirus in the U.S.
USD remained supported during the week largely due to the release of upbeat economic data which strengthened expectations that the U.S. economy is on a solid footing. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.25% on a week on week basis and is at a level of 97.85.
U.S. housing starts in December posted the biggest gain in 13 years. Retail sales were also on the rise and a gauge of manufacturing activity rebounded to its highest in eight months.
According to the National Association of Realtors, U.S. existing home sales index rose by 3.6% which is the strongest pace of growth since February 2018. The U.S. PMI for manufacturing slipped to a three-month low in January, but the services PMI rose to the highest level since last March.
US 10-year benchmark bond yields fell sharply by 14 bps to 1.69% last week amid the rise in the global risk aversion after few cases of the coronavirus was reported in the U.S., raising worries that the pathogen from China may have a bigger impact on travel and trade than initially thought. Market Participants continued to monitor the coronavirus’s rapid progress in China and across the globe, amid fears that it could dent the global economic momentum.
Experts believe that if the virus is not contained in the next few months, it could chip a few points off China’s economic growth rate at a time when its overall share of the world economy was second only to the U.S.
Eurozone bond yield also fell sharply last week. German 10-year bond yields fell by 12 bps last week, France 10-year bond yields fell by 12 and is at negative 0.08%. Italy’s 10-year benchmark yields rose by 15 bps.
US benchmark Junk bond yield rose by 10 bps and is at 5.18%, Euro benchmark Junk bond yields rose by 6 bps to 2.61%.