The INR last week appreciated sharply against the USD and traded below Rs 70 levels during the week, the INR also posted its highest one-day gain since September 2013 on 18th December. The gain in INR was largely driven by tumbling oil prices, FIIs buying and Federal Reserve gradual rate hike guidance. Brent crude oil prices fell by 10.72% last week from USD 65.82 per barrel to USD 53.83 per barrel. INR appreciated by 2.15% against the USD last week and appreciated by 1.75% against the euro.
The INR was further helped by the rally in bond markets following an announcement by the Reserve Bank of India (RBI) that it would inject a total of Rs 1 trillion worth of liquidity into Indian markets in December 2018 and January 2019 through government bond purchases.
Further, the India’s trade deficit has improved in recent months as it fell from USD 17.13 billion in October 2018 to USD 16.67 billion last month despite a rise in oil imports, as per the data reported by India’s commerce ministry.
USD fell last week after the U.S. Federal Reserve raised rates as expected and amid concerns over slowing global growth. U.S. Federal Reserve in its latest concluded FOMC meeting took the target range for its benchmark fund rate to 2.25%-2.5%. The move marked the fourth increase in rates this year and the ninth since it began normalizing rates in December 2015. Central bank officials now forecast two hikes next year, down from three rate raises previously projected. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.16% on a week on week basis and is at a level of 96.96.
Federal Reserve Chairman Jerome Powell said in a press conference that monetary policy decisions would be data dependent and stressed that rate hikes would-be put-on ice should inflation fall below the central bank’s 2% target.
Other Fed officials including Fed Chairman Jerome Powell, have already indicated that interest rates are nearing neutral and have become more cautious about FOMC tightening policy amid worries of slowing global growth.
USD also came under pressure by a rise in the euro as market participants cheered some progress on the Italy budget problem after Prime Minister Giuseppe Conte struck a deal with populist leaders to submit a revised budget proposal to the European Commission.
U.S. President Donald Trump continues to criticize the Fed for raising rates and said on Monday that “it was incredible” the central bank is “even considering yet another interest rate hike.”
USD recovered on Friday after U.S. President Donald Trump threatened a “very long” government shutdown ahead of a midnight deadline, if the Senate fails to pass spending legislation that includes USD 5 billion in funding for his border wall.
British Pound appreciated by 0.14% against the USD last week after the British government said it would ramp up preparations for a no-deal Brexit, which would see the U.K. leave the European Union without a trade agreement.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 11 bps after Federal Reserve raised its benchmark interest rate by 25 bps
In a news conference after the release of the policy statement, Fed Chairman Jerome Powell said the central bank would continue trimming its balance sheet by $50 billion each month and left open the possibility that continued strong data could force it to raise rates.
Germany 10-year benchmark bond yields fell by 3 bps, German bund yields followed UST yields movement, which fell to more than eight-month lows after the Federal Reserve lowered projections for rate hikes next year.
Italy 10-year benchmark bond yields fell by 14 bps after it was confirmed that the Italian government has struck a deal with the European Commission over its 2019 spending plans. Last week Italy government said it would aim to lower its deficit target to 2.04%, down from an original target of 2.4%.
UK 10-year benchmark bond yields rose by 3 bps after Bank of England left its key interest rate on hold at 0.75%. BoE cited tightening global financial conditions, as well as the decline in oil prices, which could drag U.K. consumer price inflation below the BOE’s target of 2% over the coming months. On Brexit, the central bank said uncertainties have intensified considerably and coupled with the slowing global economy, will weigh on the near-term outlook for UK growth.
Greece 10-year benchmark bond yields rose by 14 bps, Spain 10-year benchmark bond yields fell by 3 bps, Portugal 10-year benchmark bond yields rose by 1 bps.
Emerging economies 10-year benchmark bond yields largely fell last week.
Indonesia 10-year benchmark bond yields fell by 14 bps, Indonesia central bank kept its benchmark interest rate unchanged, though it reasserted it will defend the exchange rate of the rupiah when needed. In December policy, Bank Indonesia (BI) held the 7-day reverse repurchase rate at 6%. Between May and November, the rate was hiked by 175 basis points.
South Africa 10-year benchmark bond yields fell by 16 bps after Statistics South Africa announced that the economy grew by 2.2% in the third quarter after contracting by a revised 0.4% in the second and has now exited the technical recession.
Australia 10-year benchmark bond yields fell by 9 bps, Brazil 10-year benchmark bond yields fell by 58 bps, China 10-year benchmark bond yields rose by 1 bps.
US high-yield bond yields rose by 30 bps to 7.51% and Eurozone high-yield bond yields rose by 8 bps to 4.67%.