The long maturity USD 5 billion USD/INR Swap Auction to be held on 26th March will see the INR give up partial gains that saw the currency rally to 2019 year highs last week. The weak close in global risk assets on Friday and plunging global bond yields could drive the INR lower given the demand for USD emanating from the auction.
Last week the Indian Rupee posted its sixth consecutive weekly gain. The Indian rupee, which was one of Asia’s worst performing currencies last year, has surged more than 3% since February on the back of strong portfolio flows. Since the start of March, foreign investors have bought Indian equities worth USD 3.93 billion and debt worth USD 1.56 billion. Year to date, foreign institutional investors have bought Indian equities worth around USD 5.7 billion and bought around USD 121 million in debt.
Further, the indication of an end to the tightening rate cycle in the US supported the Indian Rupee. The Federal Reserve on Wednesday brought its three-year drive to tighten monetary policy to an abrupt end, abandoning projections for any interest rate hikes this year, amid signs of an economic slowdown.
However, the Indian rupee came under pressure on Friday, after state-run banks purchased USD on behalf of Importers ahead of RBI’s Forex swap. INR appreciated by 0.20% against the USD last week and appreciated by 0.69% against the euro.
USD ended the week marginally higher despite sharp fall seen after the Federal Reserve surprised markets by ruling out any interest rate hikes in 2019. However, the revival of uncertainty over U.S.-China trade deal and the fall in British Pound amid fear of no-deal Brexit supported the USD last week.
USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.07% on a week on week basis and is at a level of 96.65. British pound depreciated by 0.65% against the USD last week and Euro depreciated by 0.23% against the USD.
USD started the week on a lower note after release of weak U.S. economic data and ahead of Fed meeting, amid hopes that the Federal Reserve will continue to hold off raising interest rates.
In its latest policy meeting held on Wednesday, Federal Reserve left its key interest rate unchanged and projected no rate hikes in 2019 and one rate hike in 2020 and none in 2021. Federal Reserve said that it is keeping the interest rate at 2.25%-2.5% and it will stop shrinking its bond portfolio in September.
Federal Reserve kept its interest rate unchanged in response to a slowdown in the U.S and global economies, Federal Reserve expects economic growth of 2.1% in 2019, down from its previous projection of 2.3% growth. Federal Reserve Chair Jerome Powell said “we foresee some weakening, but we don’t see a recession and despite the recent dip in economic growth U.S economic fundamentals are still very strong”.
Additionally, on Wednesday USD was under pressure as the optimism over U.S.-China trade deal faded following a report that the U.S. officials are concerned that Beijing might refuse to accept U.S. demands in trade talks.
In a recent development over U.S.- China trade concern, high-level officials including U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He will be meeting in Beijing for a fresh round of talks next week. Further, media reports suggest that U.S. officials are not targeting a “swift trade deal.” Instead, the goal is to reach an agreement during a meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping at Mar-a-Lago sometime before the end of April
USD managed to pare some of its losses on Thursday as market participants digested dovish stance from the Federal Reserve and after the release of upbeat U.S. manufacturing data along with slump in British Pound.
British Pound fell last week despite BoE lifting its first-quarter GDP forecast to 0.3%, above a previous estimate of 0.2%. The update on monetary policy from the central bank was overshadowed by developments on the Brexit front, as a leaked draft of the European Council’s conclusion on Brexit said the EU would grant the U.K. an extension to Brexit if lawmakers vote for the withdrawal deal next week.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 20 bps after the Fed policy outcome, as Fed was more dovish than the market expected. (Click Here to Read Our Note on Fed Policy)
Germany 10-year benchmark bond yields fell by 12 bps and fell to negative zone for the first time since October 2016. German bund yields fell sharply after the Markit PMI survey, which suggests that Germany manufacturing sector contracted for the third consecutive month in March. German PMI slipped deeper into contraction territory at 44.7 against market expectation of 48. (Below 50 indicate contraction)
U.K 10-year benchmark bond yields fell by 22 bps due to worry about no Brexit deal, PM Theresa May urged lawmakers to back her Brexit plan after they rejected it twice previously. If Theresa May fails again, she might have to choose a longer Brexit delay or taking Britain out of the EU on March 29 without a transition deal to cushion the economic shock.
Portugal 10-year benchmark bond yields fell by 5 bps after S&P upgraded Portugal sovereign debt rating to BBB from BBB-. S&P expects Portugal will continue to run budget surpluses and will reduce the ratio of debt to GDP while posting growth of 1.5% to 1.7% through 2021.
Italy 10-year benchmark bond yields fell by 3 bps after Moody’s left Italy credit rating unchanged at Baa3, Greece 10-year benchmark bond yields fell by 5 bps, Spain 10-year benchmark bond yields fell by 11 bps.
Emerging economies 10-year benchmark bond yields largely fell last week.
Brazil 10-year benchmark bond yields rose by 11 bps after Brazil central bank kept its benchmark interest rate at a record low 6.50%, the central bank said recent economic data has been weaker than expected and inflation risk is no longer skewed to the upside
Australia 10-year benchmark bond yields fell by 21 bps after data suggested improvement in jobs, Australia unemployment rate fell to 4.9% in February. The Australian economy created 4.6k jobs in February, although jobs rose only because of an increase in part-time employment.
China 10-year benchmark bond yields fell by 2 bps. Russia 10-year benchmark bond yields fell by 13 bps, Indonesia 10-year benchmark bond yields fell by 21 bps.
US benchmark Junk bond yields fell by 12 bps to 6.33%, Euro benchmark Junk bond yields fell by 17 bps to 3.51%.