Currency Market Snapshot For The Week
· INR depreciated by 1.71% against the USD last week and appreciated by 2.53% against the euro.
· USD rose by 4.12% on a week on week basis and is at a level of 102.82.
· The British pound depreciated by 5.29% against the USD
· Euro depreciated by 3.77% against the USD.
Global Bond Market Snapshot For The Week
· US 10-year benchmark bond yields fell by 10 bps last week.
· German 10-year bond yields rose by 21 bps, French 10-year bond yields rose by 10 bps.
· Italy’s 10-year benchmark yield fell by 13 bps to 1.63%.
· US benchmark Junk bond yields rose by 247 bps to 10.62%
The USD is the world’s reserve currency and in times of market crisis as seen in 2020 due to the coronavirus and in 2008 when a credit bubble burst, there is excess demand for USD in relation to supply. Read our note on USD for details.
USD is in high demand at present, March 2020, and has, unsurprisingly, strengthened against the currencies of emerging markets, which have suffered brutal capital outflows in the past one month. The USD has, more surprisingly, also strengthened against traditional safe-haven currencies such as the yen and the Swiss franc and pushed currencies like the Pound and Euro to multi-year lows, the British Pound to its weakest level in decades. On March 19th DXY index, which measures the USD against a basket of currencies, hit a multiyear high level of 102.76.
A desperate global demand for USD liquidity has amplified a worldwide equity selloff and has lead to a rise in volatility across all financial markets, and this is creating a shortage of USD liquidity globally, disrupting economies and business operations.
Companies and banks are hoarding USD to pay their debts and to keep their business flowing. A collapse in revenues, seized-up debt markets and broader fears over the economic impact of Covid-19 have encouraged companies to max out their credit lines to keep large amounts of cash at hand.
In order to ease the USD liquidity crises in the global financial market, the Fed opened new swap lines with central banks in Australia, South Korea, Brazil, and Mexico, among others, lowered the rate on global USD swap lines that were put in place during the financial crisis to help deliver USD funding to institutions in their regions. Bank for International Settlements estimates USD is used to fund about USD 17 trillion in assets globally.
In the Indian context, RBI after taking cognizance of the prevailing financial market conditions and requirement of USD in the market, has decided to undertake 6-month US Dollar sell/buy swaps to provide liquidity to the foreign exchange market amid rising volatility and a surge in outflows from emerging markets, including India. (Read our report on RBI USD INR sell/buy swap).
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 10 bps to 0.89% last week after exhibiting high volatility. The US treasury yields fell on Friday after market participants indicated that the Federal Reserve’s bond-buying program may finally have started to push prices for government paper higher and yields lower, helping to erase the counter-intuitive trading in the past sessions that saw both stocks and bonds sell-off in sync. (click here to read our full analysis on global credit markets)
The U.S. central bank announced at least USD 500 billion of asset purchases last Sunday night as part of its efforts to tamp down on the dislocations between the most liquid and least liquid Treasuries in part because dealers have been reluctant to serve as an intermediary in a volatile market. ( Click here for Global Central Bank/ Government Stimulus)
Eurozone bond yields were largely higher up last week. German 10-year bond yields rose by 21 bps last week, France 10-year bond yields rose by 10 and is at 0.10%. Italy’s 10-year benchmark yields fell by 13 bps.
US benchmark Junk bond yield rose by 247 bps and is at 10.62%, Euro benchmark Junk bond yields rose by 256 bps to 7.97%.