The INR closed at over one year lows last week, prompting the RBI to sell USD. RBI could have sold around USD 3 billion to prevent a free fall in the INR. Why is the INR on a free fall despite strong macros and ample fx reserves? We had analysed the INR fall in our note on
India’s macros as compared to 2013, when the INR fell to record lows on worries of Fed tapering asset purchases, are much stronger with indicators such as fiscal deficit, CAD, inflation, fx reserves showing vast improvement. The strong macros plus political stability led to high FII flows in Indian equities and bonds in 2017. However in 2018, the tide changed with oil prices rising globally leading to wider trade deficit, the government marginally falling short on fiscal deficit targets and volatility creeping into global financial markets on Fed rate hikes, trade wars and geo political tensions. This has led to profit taking in strong EM curriencies such as the INR that had gained around 6%.
The current volatility and fall in the INR is likely to subside as oil prices stabilize, geo political tensions ease and Fed staying on a gradual rate hike course.
USD continued to gain last week as the demand remained underpinned after Federal Reserve indicated that it is on track to keep gradually raising interest rates. The Fed, in a statement released after its two-day policy meeting, acknowledged a recent pick-up in inflation but gave no indication that it will accelerate the pace of rate increases. However, the case for a June rate hike has strengthen after the release of upbeat inflation and other U.S. economic data. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 1.12% on a week on week basis and is at a level of 92.57.
The Federal Reserve kept the interest rate unchanged at 1.5% to 1.75%, as widely expected. It also said inflation is moving higher, close to its target. The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index, rose 1.9% in the 12 months through March, nearly matching the Fed’s 2% target.
U.S. Department of Labour on Friday reported that the U.S. economy created 164,000 jobs in the month of April against the expectation of 189,000. The jobless rate fell from 4.1% to 3.9%, against the expectations of 4%. Average hourly earnings grew 0.1% for April, against the expectation of 0.2% gain.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 28th April rose by 2,000 to 211,000 from last week’s claim of 209,000 and against the expectation of a rise of 16,000 to 225,000.
Factory orders also gave an upbeat outlook for the U.S. economy as they rose 1.6% in March, against the expectation for a 1.3% rise.
Further, USD also got a boost as Euro and British Pound came under pressure last week. Euro depreciated by 1.40% against USD and GBP depreciated by 1.82% against USD.
Euro came under pressure after the release of weak economic data last week, dampening expectations that the European Central Bank will soon start scaling back stimulus. Retail sales in Germany declined for a fourth consecutive month in March, growth in the euro area economy slowed in the first quarter and inflation in the euro area slowed unexpectedly in April.
British pound was under pressure last week as immigration scandal in Britain dealt a blow to Prime Minister Theresa May as she prepares to navigate the final year of Brexit negotiations. The pound was also under pressure after data showed that Britain’s economy slowed sharply in the first quarter, prompting markets to slash expectations for a rate hike by the Bank of England next month.
Asian currencies were largely mixed last week against the USD. Australian Dollar depreciated by 0.55%. New Zealand Dollar depreciated by 0.92%. Japanese Yen appreciated by 0.76% against the USD and appreciated by 1.37% against the Euro. South Korean Won depreciated by 0.04%, Philippines Peso appreciated by 0.38%, Indonesian Rupiah depreciated by 0.37%, Indian Rupee depreciated by 0.31% against the USD and appreciated by 0.68% against the Euro, Chinese Yuan depreciated by 0.48% against USD, Malaysian Ringgit depreciated by 0.51% and Thai Baht depreciated by 0.76%.