The INR ended the week higher against the USD, as Indo-Pak tensions eases after Pakistan handed back an Indian Air Force pilot captured in the confrontation following the Kashmir suicide bombing. INR appreciated by 0.32% against the USD last week and depreciated by 0.05% against the euro.
INR appears to be on a stronger footing with Fed looking to pause on rates, oil prices cooling off on highs, inflation staying down in India, RBI rate cuts and FIIs turning net buyers in equities in February. Polictical uncertainty not withstanding, INR should stay stable until elections.
INR came under heavy selling pressure during early part of the week amid rising geopolitical tensions between India & Pakistan. However, with the news of Pakistan repatriating a captured Indian Air Force pilot, markets heaved a sigh of relief on Thursday and the INR saw significant appreciation during the day.
USD ended the week marginally higher last week after data showed that the U.S. economy registered its strongest annual growth in 12 years, but a dovish Fed kept the USD gains in check. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.02% on a week on week basis and is at a level of 96.53. British pound appreciated by 1.14% against USD last week.
USD started the week on a lower note after U.S. President Donald Trump said he would delay an increase in tariffs on Chinese goods. Trump said in a tweet that progress had been made on areas including intellectual property protection, technology transfers, agriculture, services and currency. He then added that if more progress is made, he would plan a summit meeting with Chinese President Xi Jinping at his Mar-a-Lago estate in Florida to conclude an agreement.
USD received a boost on Wednesday after Federal Reserve Chairman Jerome Powell delivered an upbeat assessment of the economy, though he did acknowledge there were some headwinds. In the first of a two-day Congressional address at the Senate Committee on Banking, Powell said the central bank is in “no rush to make a judgement” about further changes to interest rates, but noted the Fed was prepared to adjust its runoff of the balance sheet policy as necessary. Further, in the second day of his testimony Powell continued to deliver an upbeat assessment of the economy and added to expectations that the central bank was nearing an end to shrinking its balance sheet.
The U.S. GDP data released on Tuesday showed that the U.S. economy registered an annual growth rate of 2.6% in the fourth quarter of 2018, in line with the expectation but lower than 3.4% growth rate seen in third quarter of 2018. Although a significant slowdown from the kind of expansion seen in the third quarter, annual growth for 2018 still settled at a strong reading of 3.1%, marking the first time since 2005 that annual growth has topped 3%.
The GDP data was enough to initially push the USD higher, but enthusiasm began to fade as concerns over the fact that the U.S. President Donald Trump walked away from his summit with North Korean leader Kim Jong-Un without a deal.
British pound appreciated by 1.14% against the USD last week after U.K. regulators confirmed a long grace period for financial firms adapting to new rules after Brexit. Further, U.K. Prime Minister Theresa May said earlier this week that British lawmakers would get the chance to vote on a delay to Brexit If her withdrawal gets voted down on 12th March.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields rose by 8 bps after a reading of gross domestic product for the fourth quarter showed that the economy, in 2018, grew at its fastest pace since 2015. Federal Reserve Chairman Powell said the economy has been sending conflicting signals and subdued inflation, that justify a patient approach on future changes to interest rates. Powell said the economy is in a good place with unemployment down for all racial and ethnic groups, increasing labor force participation and rising wages. However, signs of upward pressure on inflation appear muted despite the strong labor market. The FOMC will be patient and will determine what future adjustments to the target range for the federal funds rate may be appropriate to support Fed’s objectives.
Japan 10-year benchmark bond yields fell by 1 bps after the Bank of Japan said it would reduce the frequency of debt-buying operations in March. BoJ said it would buy JGBs with over five to 10 years maturity in four installments in March, compared to five purchases a month in the previous six months. The BOJ has been gradually slowing the pace of its bond-buying as it is holdings near almost half of the entire market.
Eurozone annual inflation rose 1.5% in February, up from 1.4% in January, while unemployment in the eurozone remained stable at 7.8%. The provisional inflation figure is in line with market expectations, but the January unemployment figure is better than the market forecast of 7.9%. The unemployment rate of 7.8% in January and December is the lowest rate recorded in the euro area since October 2008.
Germany 10-year benchmark bond yields touched 0.2% for the first time in almost a month and were set for their biggest weekly jump in over a year, reflecting easing concerns about the global growth outlook and political risks.
Italy 10-year benchmark bond yields fell by 12 bps, Greece 10-year benchmark bond yields fell by 16 bps, Portugal 10-year benchmark bond yields rose by 2 bps, Spain 10-year benchmark bond yields rose by 3 bps.
Emerging economies 10-year benchmark bond yields were mixed last week.
Brazil 10-year benchmark bond yields rose by 8 bps, after Brazil GDP expanded by 0.1% in 4th quarter from the previous quarter, less than the market estimate of 0.2%. Government statistics agency IBGE also revised growth in the July-September period down to 0.5% from a previously reported 0.8%. The biggest drags on growth in the last quarter of 2018 were a 2.5% fall in fixed investments and contractions in industrial output and government consumption.
China 10-year benchmark bond yields rose by 5 bps after Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 49.9 for February higher than January’s reading of 48.3, and better than the market forecast of 48.5. However, manufacturing activity in February remained around contraction levels not seen since early 2016.
South Africa 10-year benchmark bond yields rose by 3 bps, Indonesia 10-year benchmark bond yields fell by 11 bps, Russia 10-year benchmark bond yields fell by 1 bps.
US benchmark Junk bond yields fell by 10 bps to 6.49%, Euro benchmark Junk bond yields fell by 17 bps to 3.69%.