The Indian Rupee traded below Rs 72 per USD level for the first time since 21st September, as oil prices posted sharp falls last week, easing worries over the current account deficit. Brent crude oil prices fell by 5% last week and has fallen by 17% in the last one month. The fall in oil prices was driven by worries over rising oil production around the world and weakening demand from developing countries, with expectations for increased supply from the US and OPEC. US crude production hit a record 11.6 million bpd (barrels per day, making the United States the world’s biggest oil producer ahead of Russia and Saudi Arabia.
Further, positive economic data which showed retail inflation dropping to a 13-month low in October also bolstered the market sentiment. Indian Rupee appreciated by 0.79% against the USD last week and appreciated by 1.01% against the euro.
USD exhibited high volatility last week and ended the week lower against major world currencies as uncertainty over Brexit deal and political issues in Italy continued to weaken market sentiments. USD was also on a backfoot last week, as Federal Reserve officials started growing less hawkish with Chair Powell expressing concerns about next year’s headwinds and Vice Chair Richard Clarida adding that there is some concern about global growth and they need to factor it in the global outlook. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.45% on a week on week basis and is at a level of 96.47.
Fed Vice Chair Richard Clarida also said that the Fed hasn’t raised rates too far or fast but that it’s too early to know if they should increase rates too far to hold back growth. The 2.5% to 3.5% range is considered a neutral level that doesn’t stimulate or hinder the economy. Further, Fed Bank of Dallas President Robert Kaplan said that the slowing growth in Europe and China could affect the U.S. economy. However, Fed is expected to increase rates in December and comments from Fed Chairman Jerome Powell have increased expectations that the central bank will gradually increase rates in 2019.
USD started the week on a higher note on Monday amid expectations that the Federal Reserve will raise rates in December after the Fed maintained its confidence that “economic activity has been rising at a strong rate. USD also remain supported, as concerns over Brexit and political issues in Italy weighed down on the pound and euro.
Sterling was pushed lower on Monday after reports suggested that Prime Minister Theresa May had cancelled a cabinet meeting to approve a Brexit deal. The move makes it unlikely that a meeting with the European Union will happen by the end of the month to discuss the UK leaving in March.
However, pound gained during mid of the week after European Union and the UK reached a draft agreement on Brexit. Further, Prime Minister Theresa May said she had obtained enough support from senior members of her Cabinet for a draft Brexit deal to move forward. But concern continues to linger over whether the draft withdrawal agreement will get parliamentary approval as UK Brexit Minister Dominic Raab resigned on Thursday. Raab, in a letter to the prime minister, said he cannot support terms of her draft Brexit plan.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 12 bps after a senior Federal Reserve official said the central bank is getting closer to reaching its neutral level, potentially setting the stage for fewer rate hikes than expected next year. Fed Vice Chair Richard Clarida said the bank needs to be particularly data-dependent when hiking rates in the future.
Fed Chair Jerome Powell emphasized the strength of U.S. growth and affirmed the central bank’s intent to raise rates at a steady pace. But louder concerns over global growth from Fed Vice Chairman Richard Clarida may stoke expectations for the central bank to pause or even end its rate hike cycle earlier than expected. Earlier Jerome Powell and Dallas Fed President Robert Kaplan had also mentioned weaker global growth as a downside risk to tighter monetary policy.
ECB President Mario Draghi said, ECB still plans to dial back stimulus at the end of the year, but inflation may rise more slowly than earlier expected. The eurozone economy has slowed in recent months. This comes amid weaker demand from China and higher interest rates for dollar borrowers across the world. Draghi said there is no reason to expect the eurozone economy to stop expanding and drag down price growth with it, but he warned of increased uncertainty around the outlook.
Germany 10-year benchmark bond yields fell by 4 bps after preliminary estimates suggested that the German economy shrank 0.2% on quarter in the three months to September 2018, worse than market expectations of a 0.1% fall and following a 0.5% growth in the previous period.
Italy 10-year benchmark bond yields rose by 7 bps after Italy re-submitted its 2019 budget to the European Commission with unchanged growth and budget deficit assumptions. the budget still plans to increase the structural deficit by 0.8% of GDP next year, rather than cut it by 0.6% of GDP as required under EU rules.
Greece 10-year benchmark bond yields rose by 19 bps, Spain 10-year benchmark bond yields rose by 5 bps, Portugal 10-year benchmark bond yields rose by 6 bps.
Emerging economies 10-year benchmark bond yields largely fell last week.
China 10-year benchmark bond yields fell by 14 bps after report suggests China’s policymakers are expected to increase the budget deficit in the coming year, as a slowing economy and the downdraft from the trade war with the U.S. raised the need for a more active fiscal policy. Authorities will increase the budget deficit target to between 2.6% and 3% of economic output, up from 2.6% this year.
Australia 10-year benchmark bond yields fell by 8 bps, Brazil 10-year benchmark bond yields fell by 25 bps, South Africa 10-year benchmark bond yields fell by 9 bps.
US high-yield bond yields rose by 18 bps to 6.96% and Eurozone high-yield bond yields rose by 19 bps to 4.00%.