Currency Market Snapshot For The Week
· INR depreciated by 0.5% against the USD last week and depreciated by 0.06% against the euro.
· USD rose by 0.12% on a week on week basis and is at a level of 99.26.
· British pound depreciated by 0.62% against the USD
· Euro appreciated by 0.13% 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 5 bps, French 10-year bond yields fell by 6 bps to negative 0.21%.
· Italy’s 10-year benchmark yield rose by 1 bps to 0.91%.
· US benchmark Junk bond yields fell by 4 bps to 5.03%
The Japanese Yen (JPY) and the Euro fell to multi-year lows against the USD and this sharp fall in the world’s two major currencies is starting to worry markets. The INR felt the impact of the USD strength against majors and depreciated last week.
The fall in the JPY and Euro is disconcerting as the markets have traditionally viewed the Yen as a safe-haven currency and the Euro has typically strengthened with an equity market rally. Equities are at record highs, bond yields at record lows in Eurozone and down in the US while Gold, seen as a safe-haven bet, is rising in price terms. A Yen and Euro fall with Gold prices rising and bond yields falling are sending different signals to markets and with the current Coronavirus outbreak in China disrupting economies, markets may turn extremely volatile.
To some extent, the fact that the Fed is keeping rates steady while the Bank of Japan and the ECB are staying highly accommodative is causing the USD to strengthen. The Japanese and Eurozone economies are seen as weakening on China virus issues while the US economy is seen as resilient but with global growth issues and Apple sounding warning on guidance due to the virus disruption, the US economy is not likely to stay strong. US treasury yields have fallen sharply indicating the market’s recession fears.
INR may come under pressure if the currency markets are volatile given that the Indian economy is highly vulnerable at present on the back of sharp economic slowdown that has seen its GDP growth plummet to 5% levels against 7% levels seen previously.
Weekly Currencies Movement Analysis
EM currencies traded lower against USD last week as market participants avoided riskier assets on fears about the global economic impact of the coronavirus outbreak after China reported a spike in new cases. USD touched a three year-year high against a basket of currencies, while prices of gold hit their highest level in seven years.
Market participants grew anxious about the growing possibility of a slowdown in China due to fast-spreading coronavirus that has hit consumer spending and manufacturing activity in the country. Moreover, major companies such as Apple have warned of a marked slowdown in profits for the March quarter.
In response to the concern over economic impact, the People’s Bank of China on Thursday lowered the one-year loan prime rate to 4.05% from 4.15%, and the five-year rate to 4.75% from 4.80%. In reaction to this, the Chinese yuan fell past the 7.00 mark against USD to as low as 7.04 per USD, which also weighed on the INR and on other EM currencies.
INR depreciated by 0.5% against the USD last week and depreciated by 0.06% against the euro.
The return of risk aversion in the financial markets has prompted USD to rise against major world currencies last week amid concerns about the extent of the damage caused by the coronavirus in China. Market participants started to believe that the economic impact of COVID-19 may not be contained to China and is spilling over into neighboring regions. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.12% on a week on week basis and is at a level of 99.26.
The growing number of cases of the coronavirus outside China, especially in South Korea, raised fears that the damage to supply chains could hit several major Asian economies which are linchpins for industries like semiconductors and automobiles.
The euro remained under pressure during most part of the week before recovering on Friday, the weakness is largely due to ongoing signs of weakness in Germany.
USD also came under pressure on Friday paring its most of the weekly gain after data showed that the key U.S. services sector unexpectedly contracted, signaling potential trouble ahead of the U.S. economy.
The IHS Markit flash services sector Purchasing Managers’ Index dropped to 49.4 in February, the lowest in six years, raising concerns about the health of the broader economy as services account for roughly 66% of total growth. The weakness in manufacturing, continued, showing a weaker-than-expected reading of 50.8.
Euro recovered against USD on Friday after euro-zone economic activity unexpectedly accelerated to the fastest pace in six months in February, with services proving resilient as factories battled challenges including the coronavirus outbreak.
US 10-year benchmark bond yields fell sharply by 14 bps to 1.47% last week as worries about a Chinese and Asian economic slowdown spilling over into the U.S. lifted market participants expectations for interest rate cuts later in the year, despite speeches by senior Federal Reserve officials including Fed Vice Chairman Richard Clarida suggesting no further easing was imminent.
Eurozone bond yield was mixed last week. German 10-year bond yields fell by 5 bps last week, France 10-year bond yields fell by 6bps and is at negative 0.21%. Italy 10-year benchmark yields rose by 1 bps.
US benchmark Junk bond yield fell by 4 bps and is at 5.03%, Euro benchmark Junk bond yields fell by 11 bps to 2.40%.