INR ended the week lower on month end demand and profit booking. The INR should stay ranged around Rs 69 to Rs 70 levels until the elections end in May. FIIs have pumped in around USD 7.5 billion through debt and equity investments in the April-March 2019 period, leading to the INR strengthening to levels of Rs 68 an9 against the USD. FIIs have turned buyers of INR assets on the back of a dovish Fed and perceptions of lower political uncertainty in the elections. India’s BOP, which was negative in the 3rd qtr of FY 19, is expected to turnpositive in Q4FY19, on FII flows. Read our report on CAD for Q3FY19.
Currency markets may prefer to tread with caution until elections end in May and this would keep the INR ranged.
RBI last week infused Rs 345.6 billion into the banking system in exchange for USD, in its first USD-INR swap auction. Through the auction, RBI bought USD 5.02 billion at a premium of Rs 7.76, which works out to an annualized rate of 3.76% from authorized dealers and paid them INR in return. (Read our analysis on RBI Long Term USD/INR Swap – Banks Get Cheap 3-year Funds)
However, INR posted gains on Friday amid optimism over progress in trade talks between the U.S. and China which lifted appetite for risk assets. INR depreciated by 0.30% against the USD last week and appreciated by 0.44% against the euro.
USD ended the week higher last week after exhibiting a volatile movement. USD, despite starting the week on weaker note, has managed to remain higher against major world currencies, as progress in US-China trade talks, signals of slowdown in Chinese economy, dovish ECB and slump in British Pound helped USD.
USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.66% on a week on week basis and is at a level of 97.28. British pound depreciated by 1.16% against USD last week and Euro depreciated by 0.76% against USD.
USD started the week on a lower note on Monday after a closely-watched indicator for recession, an inverted yield curve, appeared a week prior. This inversion of the yield curve is widely seen as a leading indicator of economic recession. It appeared before each of the last seven recessions, according to the National Bureau of Economic Research.
However, the worries of recession eased after U.S. 10-Year yield rose above the key 2.40% level as risk appetite returned, despite increasing expectations that the Fed’s next move will likely be a rate cut as soon as September. But the rise in yields was capped by weak housing data.
Further, dovish comments from European Central Bank President Mario Draghi, along with concerns over the bond market raised question marks over the health of the eurozone economy. Draghi said that the ECB could delay raising interest rates and still had other tools at its disposal to support the economy, but he admitted that the euro zone was experiencing a “persistent deterioration of external demand.”
USD rose sharply on Thursday after Initial jobless claims fell to their lowest level in two months, offsetting a downward revision to fourth-quarter gross domestic product growth. U.S. GDP growth slowed to an annualized rate of 2.2% in the last three months of the year, less than the 2.6% originally reported.
USD extended gains on Friday after a slump in the British pound underpinned the demand for USD, as Prime Minister Theresa May’s Brexit deal tasted defeat for the third-straight time. Lawmakers voted 344 to 286 to reject the government’s withdrawal agreement. The result of the vote will have “grave” implications, May said. She added further that the “legal default” was that the U.K. would leave the EU on April 12. That raised concerns that a no-deal Brexit could be on the horizon.
But the lawmakers will gather again on Monday to vote on series of options to find a way out of the current political quagmire. The possible Brexit scenarios include a new referendum, revoking Article 50, a no-deal Brexit and a general election.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 2 bps after poor economic data, U.S Q4 economic growth was revised down to 2.2% from 2.6% reported earlier. Commerce Department said the revision of gross domestic product (GDP) growth came after more complete data were used for the final calculations. Economy growth was slower due to weak consumer spending and weak business sentiment. For full year 2018, the US economy grew by 2.9%, the most since 2015, and above 2.2% in 2017, but the boost from the Trump tax cuts and higher government spending appeared to be fading.
ECB President Mario Draghi said recently that the central bank is ready to take further action to help the economy if the outlook takes a sudden turn for the worse. ECB would take all monetary policy actions that are necessary in addition to steps taken at its March 2019 policy meeting, (In March meeting, ECB extended the earliest date for rate increases and announced new cheap loans for banks). Draghi also said bank could respond to weaker than expected inflation by adjusting its timetable for interest rate increases. Right now, the rates will not rise before the end of the year.
Germany 10-year benchmark bond yields fell by 5 bps after the dovish remark by ECB Chair Mario Draghi and uncertainty due to Brexit.
U.K 10-year benchmark bond yields fell by 2 bps due to uncertainty around the Brexit deal. Lawmakers rejected Prime Minister Theresa May Brexit deal for the third time and leaving U.K departure from EU in turmoil. The European Commission says the UK may have to leave the European Union on 12 April in a no-deal Brexit.
Italy 10-year benchmark bond yields rose by 5 bps after Italy finance minister Giovanni Tria said Italy can’t afford to raise taxes or cut public spending now because it would worsen the economic prospects of a country that has slipped back into recession. (In the last quarter of 2018, the Italian economy entered a recession after two successive quarters of negative growth.)
Portugal 10-year benchmark bond yields fell by 2 bps, Greece 10-year benchmark bond yields rose by 1 bps, Spain 10-year benchmark bond yields rose by 2 bps.
Emerging economies 10-year benchmark bond yields were mixed last week.
Brazil 10-year benchmark bond yields fell by 6 bps. Brazil central bank cut its 2019 growth forecast. In its quarterly report, the central bank said it expects the economy to expand by 2.0% this year, down from 2.4% forecast in its last report in December.
South Africa 10-year benchmark bond yields fell by 16 bps, South Africa central bank kept its benchmark repo rate unchanged at 6.75%. Central bank said the risks to the inflation outlook were more or less evenly balanced.
China 10-year benchmark bond yields fell by 6 bps. Russia 10-year benchmark bond yields rose by 11 bps, Indonesia 10-year benchmark bond yields rose by 7 bps.
US benchmark Junk bond yields rose by 1 bps to 6.34%, Euro benchmark Junk bond yields fell by 4 bps to 3.47%.