INR that gained from political stability post election results on 23rd May is likely to face heat from the weak 4th quarter GDP numbers and Trump’s tariff threat on Mexico.
INR traded lower against the USD last week on the back of month-end USD demand from importers, persistent concerns over the US-China trade war and rise in crude oil prices. However, INR received some support after the Trump administration on Tuesday removed India from its currency monitoring list of major trading partners, citing certain developments and steps being taken by New Delhi that address some of its major concerns.
The Indian economy grew by an annualized rate of only 5.8% in the fourth quarter of 2018, below 6.3% that was expected and 6.6% recorded in the third quarter. Other economic indicators released shows that Infrastructure output rose by 2.6% in April while foreign exchange reserves remained stable at USD 419.99 billion.
INR depreciated by 0.26% against the USD last week and depreciated by 0.09% against the euro. Going forward, the focus will be on RBI monetary policy outcome scheduled on June 6 where the central bank is expected to cut rates by 25bps.
USD ended the week higher against major world currencies and traded at two-year high levels, as persistent trade tensions underpinned the demand for safe haven assets. USD was additionally supported by the release of upbeat consumer confidence data, which showed that the Conference Board’s consumer confidence index for May rose to 134.1 from 129.2 in April. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.16% on a week on week basis and is at a level of 97.74.
USD started the week on a higher note on Tuesday, as market sentiments remained subdued amid persistent uncertainties over trade and the outlook for global economic growth. Trade concerns remained in the forefront after U.S. President Donald Trump said on Monday that Washington was not ready to make a deal with Beijing, but he expected one in the future, while at the same time pressing Japanese Prime Minister Shinzo Abe to even out a trade imbalance with the United States.
Trade tensions escalated further on Thursday after Chinese Vice Foreign Minister Zhang Hanhui said that provoking trade disputes is “naked economic terrorism”, days after U.S. President Donald Trump said Washington is “not ready for a deal” with China. Further, the remarks came a day after Chinese newspapers warned that Beijing could use rare earth exports to strike back at the U.S.
Euro depreciated against the USD last week due to the stronger USD and political tensions over who will rule Europe as the European Union meets to decide who will succeed Jean-Claude Juncker as European Commission president. Center-right and center-left parties lost their shared majority in last week’s elections, while increased Green and Liberal seats mean it could be harder for Germany to gain support for its preferred candidate, Manfred Weber.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 18 bps, The yield on the benchmark 10-year Treasury note fell to a 19-month low as market is now more certain that the U.S.-China trade war will last longer and that will hurt GDP growth more than first estimated. President Donald Trump said from Japan on Monday, the U.S. was “not ready” to make a deal with China, adding to recent market anxiety that the tit-for-tat trade war between the world’s two largest economies is far from over.
U.S. consumer prices increased by the most in 15 months in April, but a potential slowdown in economic growth could keep inflation pressures moderate. Inflation remains below the Fed 2.0% target, coupled with the slowing economy will put pressure on Federal Reserve to cut interest rates. Personal consumption expenditures (PCE) price index increased 0.3% in April, the biggest gain since January 2018, after rising 0.2% in March. That lifted the annual increase in the PCE price index to 1.5% in April from 1.4% in March.
Germany 10-year benchmark bond yields fell by 9 bps, as safe-haven demand increased sharply. Markets received a fresh blow after Donald Trump threatened to hit Mexico with tariffs, deepened concerns over world trade.
Italy 10-year benchmark bond yields rose by 14 bps, as the battle of budgets between the Italian Government and E.U resumed, a letter from the EU was sent to Rome notifying them that unless they modify their budgetary plans, the Italian economy may suffer a $4 billion fine. The disciplinary process is known as the Excessive Deficit Procedure.
Portugal 10-year benchmark bond yields fell by 16 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 2 bps, Brazil economy shrank in the first quarter of the year. The statistics agency said Gross Domestic Product contracted 0.2% from the previous quarter, marking the first decline in the key indicator of economic activity since the end of 2016.
South Africa 10-year benchmark bond yields fell by 7 bps after President Ramaphosa announced his smaller cabinet, following on from a pre-election pledge to reform and revive an ailing economy and attract foreign investors.
Indonesia 10-year benchmark bond yields fell by 6 bps after S&P Global Ratings raised its sovereign credit rating for Indonesia by one level to BBB from BBB-, S&P said the Indonesia strong growth prospects and prudent fiscal policy are key reasons behind the upgrade.
China 10-year benchmark bond yields fell by 4 bps. Russia 10-year benchmark bond yields fell by 5 bps, Australia 10-year benchmark bond yields fell by 5 bps
US benchmark Junk bond yields rose by 5 bps to 6.42%, Euro benchmark Junk bond yields rose by 4 bps to 3.63%.