INR traded higher against the USD last week after BJP-led NDA government had a landslide victory in the recently concluded general elections. During the week, sustained foreign fund inflows, lower crude oil prices and strengthening Asian currencies provided additional support to INR. However, concerns over ongoing US-China trade tariff tussle continued to keep a check on gains. INR appreciated by 1.02% against the USD last week and appreciated by 0.82% against the euro.
INR will stabilize at higher levels, but direction will come from global issues of trade wars, central bank policies and geopolitics. However, strong political standing of the ruling party would ensure continuity in economic reforms and will be a big positive for economic growth revival and will help the INR to consolidate at these levels.
USD ended the week lower against major world currencies after hitting fresh multi-month highs against the euro, pound, Australian and New Zealand dollars this past week. USD came under heavy selling pressure on Friday amid rising expectations that the Federal Reserve will have to cut interest rates to support the U.S. economy to offset the damage from a widening trade war with China. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.42% on a week on week basis and is at a level of 97.58. British pound depreciated by 0.40% against USD last week and Euro appreciated by 0.27% against USD.
USD started the week on a higher note on Monday following increased trade tensions after the White House blacklisted Chinese giant Huawei. Further, Google and other companies announced that they have stopped doing business with Huawei, raising more uncertainty over how trade negotiations between the U.S. and China will pan out. However, on Tuesday trade tensions eased somewhat after the U.S. removed some restrictions on Huawei.
Meanwhile, on Monday tense rhetoric between the U.S. and Iran continued after U.S. President Donald Trump tweeted about the “official end of Iran.” Iran’s Foreign Minister Mohammad Javad Zarif accused Trump of distributing “genocidal taunts” in response, adding that the president should “try respect.”
USD on Tuesday got a boost and hit a fresh three-week high against its developed-market peers after Federal Reserve Chairman Jerome Powell indirectly argued against cutting interest rates in the near term due to the already-high level of corporate debt. However, the release of minutes of the Federal Open Market Committee’s April 30 – May 1 meeting suggested that there is no strong case to move rates in either direction and that the Fed’s patient approach to rate-change would be appropriate “for some time.”
Trade tensions fears resurfaced on Wednesday after market reports suggested that the U.S. is looking to blacklist more Chinese companies, just days after it eased restrictions on Chinese tech giant Huawei. Market participants are concerned that banning Chinese companies from buying US products could have negative consequences across the broader technology sector.
British Pound depreciated by 0.40% against the USD amid political volatility in the U.K. On Friday, U.K. Prime Minister Theresa May announced that she will resign effective June 7. On Wednesday House of Commons leader Andrea Leadson resigned instead of introducing May’s revised Withdrawal Agreement bill.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 7 bps, as the market is worried about potential trade wars, which can last longer than anticipated. Gao Feng, the spokesperson for China Ministry of Commerce, said trade talks could only continue if the U.S. corrected its actions, and Washington crackdown on Chinese companies was threatening global supply chains.
A reading of Markit manufacturing purchasing managers survey for May fell to a nine-and-a-half-year low at 50.5 from 52.6 in April. San Francisco Fed President Mary Daly said both a tight labor market and concern among businesses about their profit margins should boost inflation as the year unfolds, Daly said she expects inflation to move to the Fed’s 2% target, but not above that level.
Germany 10-year benchmark bond yields fell by 1 bps, German business sentiment dropped in May, as companies assessment of their current situation worsened. The Ifo business-climate index slipped to 97.9 points from 99.2 points in April. The Ifo result is based on a poll of about 9,000 companies in manufacturing, services, trade, and construction.
UK 10-year benchmark bond yields fell by 7 bps to near two-year lows after Prime Minister Theresa May said she would step down on June 7, bond yields fell as markets expect that May would make a statement about her future, paving the way for a new, more eurosceptic Conservative prime minister. Credit rating agency Moody’s also said May’s departure increased the risk of a no-deal Brexit and related consequences such as slower growth that would boost the chance of another rating downgrade.
Italy 10-year benchmark bond yields fell by 13 bps after Italy Deputy PM Salvini said his right-wing League party wanted to change European Union fiscal rules to push through tax cuts because they do not want a deficit overshoot that lifted the Italian government bond yields (debt cost). Salvini said he is ready to discuss the issue with French and German leaders after an EU parliament election.
Portugal 10-year benchmark bond yields fell by 10 bps, Spain 10-year benchmark bond yields fell by 6 bps.
Emerging economies 10-year benchmark bond yields were mixed last week.
Australia 10-year benchmark bond yields fell by 12 bps, Australia central bank is set to cut interest rates if the labor market fails to improve further. Australia’s jobless rate ticked higher to 5.2% in April following an upwardly revised 5.1% rise in March. As a result, markets may now price in a higher probability of RBA slashing rates by 25 basis points in June. The probability currently stands around 40%.
Indonesia 10-year benchmark bond yields fell by 10 bps, South Africa 10-year benchmark bond yields fell by 15 bps, China 10-year benchmark bond yields rose by 5 bps. Russia 10-year benchmark bond yields fell by 8 bps.
US benchmark Junk bond yields rose by 5 bps to 6.37%, Euro benchmark Junk bond yields rose by 4 bps to 3.59%.