INR ended the week higher against the USD after US Federal Reserve’s monetary policy statement and economic projections raised expectations of a cut in the federal funds target range and spurred foreign fund inflows into domestic financial assets. However, gains in INR were limited by purchases of the USD by some state-owned banks and sharp rise in crude oil prices. Brent Crude oil prices surged nearly 5% due to fears of a disruption in supply of the commodity as a result of a military confrontation between the US and Iran. INR appreciated by 0.32% against the USD last week and depreciated by 0.13% against the euro.
USD traded lower against major world currencies after the Federal Reserve in its latest concluded FOMC meet indicated that it was prepared to lower interest rates amid mounting concerns over the global growth outlook. The case for the Fed cutting interest rate this year gained strength amid ongoing trade tensions between the U.S. and China, which have slowed global growth and placed downward pressure on inflation.
The Fed also dropped its pledge to be patient, instead saying it will “act as appropriate to sustain the expansion” and to “closely monitor the implications of incoming information for the economic outlook.”
USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 1.39% on a week on week basis and is at a level of 96.22.
The Bank of Japan kept monetary policy steady on Thursday but echoed the Fed in warning that global risks were increasing amid trade tensions and uncertainty over U.S. economic policies, signalling that it, too, is leaning more toward ramping up monetary support.
Euro appreciated sharply in the later part of the week after trading lower against USD. European Central Bank President Mario Draghi hinted at a fresh round of stimulus to come.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 2 bps, U.S. Federal Reserve signaled interest rate cuts beginning as early as July, saying it is ready to battle growing global and domestic economic risks as it took stock of rising trade tensions and growing concerns about weak inflation. The bulk of Fed policymakers slashed their rate outlook for the rest of the year by roughly half a percentage point. Fed Chair Jerome Powell said although economic growth is expected to continue there is concern about the economic outlook due to unpredictable outcome of a trade dispute with China and other countries. Fresh economic projections released by the Fed show nearly half of the 17 policymakers now show a willingness to lower borrowing costs over the next six months, and seven see rates likely to warrant being lowered by a full half a percentage point
Mario Draghi told an ECB conference the central bank would ease policy again if inflation and economy fail to accelerate, saying that fresh bond purchases, rate cuts or changes to the ECB policy guidance had all been “raised and discussed” at a meeting. Post the Draghi comment bond yields across the eurozone collapsed.
Germany 10-year benchmark bond yields fell by 2 bps, after Mario Draghi comment and after a economic data indicator showed the country in poor health, German ZEW headline numbers for June showed that the Economic Sentiment Index came in at -21.1 against market expectation of -5.9 and below -2.1 recorded in the last month. The sharp drop in the ZEW Indicator of Economic Sentiment coincides with increased uncertainty regarding the future development of the global economy
Italy 10-year benchmark bond yields fell by 18 bp,s Portugal 10-year benchmark bond yields fell by 2 bps, Spain 10-year benchmark bond yields fell by 6 bps.
UK 10-year benchmark bond yields rose by 1 bps after Bank of England held interest rates steady in its latest policy meet amid the possibility of a no-deal Brexit still hanging over the U.K. The Central bank also cut its growth forecast for UK economy to zero in the second quarter of 2019, highlighting global trade risks and growing fears of a damaging no-deal Brexit. BOE officials had previously talked of the need for higher borrowing costs in the not-too-distant future, but Governor Mark Carney announced that the central bank MPC had voted unanimously to hold rates at 0.75%.
Emerging economies 10-year benchmark bond yields were mixed last week.
Brazil 10-year benchmark bond yields fell by 16 bps, Brazil central bank held its benchmark interest rate at a record-low 6.50%, as expected, holding back from signaling looser policy because of doubts on economic reforms.
Russia 10-year benchmark bond yields fell by 16 bps after Russia Central Bank cut its key interest rate to 7.5% from 7.75%, the first cut since the start of the year, and said it might lower rates again. The bank said in a statement that annual inflation is continuing to slow and economic growth in the first half of 2019 has been lower than it expected, leading it to lower its inflation forecast for the year to 4.2-4.7% from 4.7-5.2 %.
South Africa 10-year benchmark bond yields fell by 26 bps, China 10-year benchmark bond yields fell by 2 bps, Australia 10-year benchmark bond yields fell by 7 bps
US benchmark Junk bond yields fell by 30 bps to 5.85%, Euro benchmark Junk bond yields fell by 45 bps to 3.04%.