INR ended the week lower last week after the central bank delivered its widely anticipated second rate cut of the year but refrained from shifting to a more easy stance on monetary policy. RBI stayed dovish in its April 2019 policy review, lowering the Repo Rate by 25 bps and also lowering inflation and growth forecast. . INR depreciated by 0.13% against the USD last week and depreciated by 0.15% against the euro.
Further, the RBI decision to inject additional INR liquidity for a longer duration through long-term foreign exchange Buy/Sell swap has put additional pressure on INR. USD/INR Buy/Sell swap auction of USD 5 billion for tenor of 3 years will be conducted on 23rd April 2019.
USD remained range bound last week after the release of mixed economic data, worries over a no-deal Brexit and amid trade optimism. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.11% on a week on week basis and is at a level of 97.40. British pound appreciated by 0.02% against the USD last week and Euro depreciated by 0.02% against the USD.
USD started the week on a lower note on Monday after a bounce in Chinese manufacturing activity and as U.S. retail sales fell unexpectedly. However, the fall in British pound during the early part of the week after U.K. lawmakers rejected all alternative options to Prime Minister Theresa May’s Brexit deal, gave support to the USD.
The four options that were rejected include a call on the government to negotiate a permanent customs union, the U.K joining the European Free Trade Association and European Economic Area (Common Market 2.0), a confirmatory public vote on the Brexit deal and a choice between no-deal Brexit or revoking Article 50 – stopping Brexit – if the EU does not agree to an extension.
USD came under pressure on Wednesday, as the British Pound surged after signs of a possible breakthrough on Brexit. U.K. Prime Minister Theresa May offered talks to opposition leader Jeremy Corbyn to ensure an orderly and negotiated departure from the European Union, rather than give in to lawmakers on her own side who are ready to accept the consequences of a disorderly Brexit without transitional arrangements.
USD turned higher during the later part of the week, as U.S. jobless claims fell to a multi-decade low level and amid release of mixed monthly employment report. Nonfarm payroll rose more than expected, but average hourly earnings grew at a slower pace than anticipated, indicating that inflation pressure has decreased. The numbers support the Fed’s decision to extend its pause on hiking rates.
Nonfarm payrolls rose by 196,000 compared to expectations for a 180,000 gain. The unemployment rate remained unchanged at 3.8%, but average hourly earnings, an important number to gauge inflation, slowed to 0.1% from 0.4% year over year in March.
Meanwhile, trade worries eased after U.S. and China conceded that progress had been made. Still, U.S. President Donald Trump declined to announce a trade summit with Chinese leader Xi Jinping, saying it would be at least four or more weeks until a trade deal was signed.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields rose by 9 bps, as global equity markets rallied after robust economic data from US and China sapped safe-haven demand for assets. The Institute of Supply Management manufacturing index rose to 55.3 in March, well above the market forecast of a 54.3. Nonfarm payrolls rose by 196,000 in March, beating the market expectations of 180,000 new jobs.
China manufacturing PMI touched 50.5 in March up by 1.3 points compared to the previous month reading. Reading above 50 indicates expansion, Manufacturing PMI rose above 50 after 3 months. December, January and February reading was below 50. Bond yields also inched up higher as the market expects a successful outcome in the latest round of trade talks between US & China.
ECB March policy minutes shows that ECB officials discussed more aggressive stimulus measures to support Europe’s weakening economy. Minutes also suggests that officials are concerned that the eurozone current soft patch will drag on for longer than expected. ECB still hopes for a rebound in growth in the second half of 2019, but officials admitted that such projections might be considered optimistic, some officials also argued that the ECB shouldn’t increase rates before March 2020.
Prime Minister Theresa May said she would seek another Brexit delay to agree on an EU divorce deal with the opposition Labour Party leader. Thersa May has already secured a withdrawal agreement with the E.U in November but she has failed thrice to get the support of British lawmakers. It is still unclear how and when U.K will leave the EU.
Germany 10-year benchmark bond yields rose by 7 bps and marginally rose above zero percent, as concerns about Brexit offset the optimism about US & China improved economic data.
Greece 10-year benchmark bond yields fell by 22 bps after a Bloomberg report suggested that the country is considering an early repayment of part of its loans from the International Monetary Fund.
Italy 10-year benchmark bond yields rose by 1 bps after Bloomberg reported that Italy is preparing to cut its gross domestic product (GDP) forecast from an earlier target. Italy is set to cut its 2019 growth forecast from 1% down to just 0.1%. Last week, Italy’s Sole 24 Ore reported that the government is set to downgrade GDP along with introducing a package to boost growth.
Portugal 10-year benchmark bond yields rose by 1 bps, Spain 10-year benchmark bond yields were unchanged on a weekly basis.
Emerging economies 10-year benchmark bond yields were mixed last week.
South Africa 10-year benchmark bond yields fell by 10 bps after credit rating agency Moody’s left its sovereign rating for South Africa unchanged. It rates South Africa foreign- and local-currency debt at Baa3, with a stable outlook.
China 10-year benchmark bond yields rose by 19 bps. Russia 10-year benchmark bond yields fell by 7 bps, Indonesia 10-year benchmark bond yields fell by 10 bps, Brazil 10-year benchmark bond yields rose by 1 bps.
US benchmark Junk bond yields fell by 6 bps to 6.28%, Euro benchmark Junk bond yields fell by 14 bps to 3.33%.