INR lost more ground against the USD last week to close at over one-year lows. 10 year UST yield crossing 3% and rising oil prices drove the INR down. Will the INR weaken further?
The INR is moving more on sentiment that is weak rather than economic fundamentals. The currency is looking like it has reached its low and incrementally could gain from lower levels given that economic indicators are strong. where we argue that spreads are a sell and could come off on lower Gsec yields.
USD gained last week as the demand for USD was underpinned by expectations of a faster pace of rate hikes by the Federal Reserve in 2018. The rate hike expectations were boosted by the recent rise in U.S. 10-year treasury yields, which crossed 3% levels last week and is currently trading at 2.96%. The rise in U.S treasury yields is strengthening the inflation prospects in the economy. Further, the release of better than expected U.S. GDP data and an upward revision to the University of Michigan’s consumer confidence index have added to the optimism of strengthening U.S. economy. Every U.S. policymaker who has spoken this month was in favor of more tightening.
U.S. Commerce Department on Friday reported that U.S. Gross domestic product grew by 2.3% in the first quarter against the expectation of 2.0% and was down from 2.9% in the previous quarter. The slowdown was largely based on the drop in real consumer spending to 1.1% in the first quarter, from the prior 4.0%.
In a separate report on Friday, the Labour Department said wages and salaries shot up by 0.9% in the first quarter. That was the largest increase since the first quarter of 2007 and followed a 0.5% rise in the fourth quarter. Wages and salaries were up 2.7% in the 12 months through March compared to 2.5% in the year to December.
The GDP report also showed that the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, increased at a pace of 2.5%. It was the fastest pace since the fourth quarter of 2007. The core PCE price index rose 1.9% in the fourth quarter.
USD received additional support during the week as geopolitical tensions eased after North Korea’s leader Kim Jong Un said he might be open to putting nuclear tests on hold. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 1.36% on a week on week basis and is at a level of 91.54.
USD will continue to drive currency flows in the week ahead. The Federal Reserve meeting is scheduled on Wednesday and U.S. nonfarm payrolls report is scheduled to be released on Friday. Having just raised interest rates at their last meeting, the Fed has no plans to follow up in May. However, if instead of giving guidance, the Fed chooses to express concerns about the rise in yields and its impact on financial market conditions, the USD will come under pressure.
U.S. existing home sales rose strongly in March, a second straight monthly increase. U.S. National Association of Realtors reported that existing home sales rose 1.1% to an annual rate of 5.60 million units last month.
U.S. Commerce Department reported on Tuesday that new home sales rose 4% to an annual rate of 694,000 units last month against the expectation for rise of 1.9% to 625,000 units.
The Conference Board’s consumer confidence gauge rose to a reading of 128.7 from 127.0 the previous month against the expectation of a reading of 126.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 21st April fell by 24,000 to 209,000 from last week’s claim of 233,000 and against the expectation of a fall of 3,000 to 230,000.
Euro depreciated by 1.29% against USD last week despite stronger Eurozone confidence, healthy German labour data and optimistic comments from European Central Bank President Mario Draghi. The ECB left euro zone interest rates unchanged on Thursday and reiterated its pledge to continue buying government bonds until at least the end of September or until inflation has risen sustainably close to its target.
However, Draghi said that euro area growth is expected to remain “solid and broad-based”, but he noted that growth seems to have moderated broadly recently, with some countries experiencing a loss of momentum. He also warned that global risks such as protectionism have risen – a clear reference to U.S. President Donald Trump’s trade spat with China.
Asian currencies were largely lower last week against the USD. Australian Dollar depreciated by 1.19%. New Zealand Dollar depreciated by 1.69%. Japanese Yen depreciated by 2.08% against the USD and depreciated by 0.01% against the Euro. South Korean Won depreciated by 0.89%, Philippines Peso appreciated by 0.39%, Indonesian Rupiah remained flat, Indian Rupee depreciated by 0.83% against the USD and appreciated by 1.04% against the Euro, Chinese Yuan depreciated by 0.57% against USD, Malaysian Ringgit depreciated by 0.56% and Thai Baht depreciated by 0.56%.