INR weakened last week against the USD amid escalation in U.S. China trade war, firming up of oil prices and FII outflows. INR and other emerging currencies were under sharp pressure last week after the US trade representative’s office formally filed documents to raise tariffs on USD 200 billion worth of Chinese imports to 25% from 10%, effective Friday. The development comes after the US accused China of backtracking on key commitments made in the draft agreement during earlier negotiations.
Further, the volatility in Brent crude oil prices and uncertainty surrounding the outcome of General Elections also weighed down the INR. However, INR gained on Friday, snapping its four-session losing run as media reports suggested that the US Treasury Department may name Vietnam as a currency manipulator and is expected to remove India and South Korea from its watch list. INR depreciated by 0.99% against the USD last week and depreciated by 1.66% against the euro.
USD ended lower last week while Japanese Yen gained sharply against the USD, as the trade tensions between the U.S. and China increased risk aversion in the currency markets, increasing appetite for the safe-haven yen. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.19% on a week on week basis and is at a level of 97.33.
The tariffs on USD 200 billion worth of Chinese imports into the U.S. will be raised to 25% from 10%, and President Donald Trump said he had ordered the preparation of new tariffs on a further USD 325 billion worth of goods. If that come into force, it will mean nearly all of the U.S.’s imports from China will be subject to a 25% tariff. Beijing threatened to retaliate but had not issued any detailed measures.
Further, the risk-off sentiment was reinforced by Iran’s announcement that it will stop implementing “some commitments” under the UN-approved 2015 nuclear deal, another challenge to U.S. power that comes only three days after North Korea conducted a series of tests of what may have been ballistic missiles. President Hassan Rouhani warned that the Islamic Republic would resume high-level uranium enrichment if the other signatories to the deal – including Russia, China, France and Germany, didn’t act to protect its economy from U.S. sanctions within 60 days.
British Pound came under pressure last week after calls for Prime Minister Theresa May to resign grew louder following the results of local elections, in which both the ruling party and opposition suffered heavy defeats amid a backlash over a prolonged Brexit process. Further, the pound came under additional pressure after the U.K. confirmed that it will take part in the European parliament elections on May 22, a move that effectively admitting that there will be no deal between the Conservative and Labour parties in the meantime.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 8 bps last week on the back of safe haven demand for assets. On 9th May 2019, the UST yield curve inverted again, with 10-year Treasury yields once again lower than the interest rates on short-term T-bills, as markets are concerned over the economic outlook. The 10-year yield on 9th May fell as much by 6 bps to around 2.42%, three-month bills were trading at around 2.428%. The curve was briefly inverted in the morning trading, although the gap has since shifted back to slightly above zero.
In March, UST yield curve was inverted and then the curve steepened, as better than expected data and the Federal Reserve’s decision to halt interest rates calmed nerves in the market. However, the yield curve went back into inversion with 10-year Treasury yield falling below three-month bill yields, but other measures of the yield curve, such as the two-year, 10-year Treasury spread still remains positive. 10 year UST rallied after President Donald Trump pledge to raise tariffs on Chinese imports sent U.S. equities tumbling, Trump tweeted his vow to hike tariffs on $200 billion of Chinese imports to 25% from the current 10%
Germany 10-year benchmark bond yields fell by 6 bps and moved back to negative territory after the European Commission revised down euro-area growth forecasts. The EC forecast domestic eurozone growth at 1.2% this year, slower than the 1.3% it predicted in February. EC forecasts that Germany economy will grow by just 0.5% in 2019, compared to the 1.1% growth it predicted in February.
Italy 10-year benchmark bond yields rose by 14 bps, as EC cut Italy forecasts to 0.1%, down from 0.2% and said the country’s deficit will balloon to 3.6% of GDP in 2020, breaking the EU’s 3% limit.
Portugal 10-year benchmark bond yields rose by 2 bps, Spain 10-year benchmark bond yields fell by 1 bps.
Emerging economies 10-year benchmark bond yields were mixed last week.
Brazil 10-year benchmark bond yields fell by 18 bps, The Brazil Central Bank maintained Brazil benchmark interest rate at 6.5% for the ninth consecutive meeting, in line with market expectations, and ruled out the possibility of a rate cut in the near future, reiterating it needs time to evaluate the Brazilian economy.
Indonesia 10-year benchmark bond yields rose by 15 bps after data suggested that the Indonesia economy grew at a slower rate than expected in the first quarter, as exports fell. Indonesia economy expanded by 5.07% per cent in the first three months of 2019 compared to the same period a year ago, Markets had been expecting growth of 5.18%.
South Africa 10-year benchmark bond yields fell by 10 bps, China 10-year benchmark bond yields fell by 10 bps. Russia 10-year benchmark bond yields rose by 2 bps, Australia 10-year benchmark bond yields fell by 6 bps
US benchmark Junk bond yields rose by 16 bps to 6.31%, Euro benchmark Junk bond yields rose by 31 bps to 3.62%.