INR ended the week lower against the USD last week amid rising crude oil prices, foreign fund outflows and due to early week USD strength. FPIs have pulled out funds from domestic equities due to the announcement in the Union Budget for 2019-20 (Apr-Mar) that a surcharge would be imposed on long-term and short-term capital gains from equity investments. The surcharge will be imposed for individuals with income of over Rs 20 million and Rs 50 million. This includes FPIs registered as individuals.
However, the INR was supported by sales of the USD by foreign banks, likely for FPIs who invested in domestic sovereign debt, driving bond yields sharply down last week. (Read our analysis on Domestic Bond Market). INR depreciated by 0.38% against the USD last week and depreciated by 0.34% against the euro.
USD ended the week lower against major world currencies despite exhibiting broad strength in the early part of the week after comments from Federal Reserve Chairman Jerome Powell raised expectations that the central bank will cut rates at its next meeting. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.49% on a week on week basis and is at a level of 96.81. British pound appreciated by 0.41% against USD last week and Euro appreciated by 0.4% against the USD.
USD started the week on a higher note on a better-than-expected jobs report that dampened expectations the U.S. Federal Reserve will cut rates aggressively to combat a slowing economy. Additionally, the concern over U.S.-China trade tensions is hitting corporate profits.
USD came under pressure after Federal Reserve chairman Jerome Powell on Wednesday in its two-day testimony to congress signaled that the central bank is ready to cut interest rates soon.
Testifying before Congress on Wednesday, Powell said the central bank will “act as appropriate” as policymakers consider “uncertainties” emanating from slowing investment, trade disputes and other issues affecting the global economy.
In addition to Powell’s testimony, which warned of extended “uncertainty” weighing on the economic outlook, the minutes of the Fed’s last policy meeting also warned that some members “judged that uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks.”
At his second day of congressional testimony, Powell said the central bank has room to ease monetary policy, noting that the historically low jobless rate still hasn’t triggered any substantial wage or price inflation.
Euro appreciated last week against the USD. The International Monetary Fund said on Thursday in an annual report said that the euro zone economy faces rising risks stemming from trade tensions, Brexit and Italy. It also backed the European Central Bank’s (ECB) plans for fresh stimulus. The report also said the euro remained slightly undervalued despite having appreciated last year. It urged countries with large trade surpluses, including Germany and the Netherlands, to invest more to help rebalance the exchange rate.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields rose by 9 bps last week despite trading lower on Friday, following testimony from Federal Reserve Chairman Jerome Powell, who entrenched expectations for rate-cuts at the end of this month. Earlier this month the UST yields had fallen to the lowest levels in two years in expectation of Fed interest rate cuts. But a stronger-than-expected rise in consumer prices in June reported on Wednesday, along with weak demand at Treasury auctions, pushed up yields after Powell confirmed the likelihood of a cut in the federal funds rate later this month.
Euro bond yields rose last week as eurozone industrial production rose for the first time since January, jumping 0.9% in May. The export-dependent eurozone has struggled under the pressure of lingering trade policy tensions, with the U.S. and China having yet reached a deal to end their longstanding trade dispute.
German and French 10-year bond rose last week. Germany’s benchmark 10-year government bond yield rose by 11 bps last week. The Italian 10-year yield rose by 36 bps to 1.75%.
Emerging economies 10-year benchmark bond yields were largely lower last week.
Brazil 10-year benchmark bond yields fell by 11 bps, Brazil central bank held its benchmark interest rate at a record-low 6.50%, as expected, holding back from signalling looser policy because of doubts on economic reforms.
Russia 10-year benchmark bond yields continued to fall after the Russian central bank plans to lower the key interest rate in small steps, taking into account the risk the government’s spending plans may strengthen the rouble, governor Elvira Nabiullina said. The central bank embarked on a monetary easing cycle last month, lowering the cost of lending amid sluggish economic growth and abating inflationary risks
South Africa 10-year benchmark bond yields fell by 8 bps, China 10-year benchmark bond yields remained flat, Australia 10-year benchmark bond yields rose by 11 bps
US benchmark Junk bond yields rose by 12 bps to 5.95%, Euro benchmark Junk bond yields rose by 14 bps to 2.97%.
