Indian Rupee exhibited high volatility last week and ended the week lower against the USD. Indian Rupee received support during early to mid-part of the week after crude oil price came under pressure and posted a third weekly decline as sharp losses in global equity markets continued to weigh on prospects for energy demand. However, in the later part of the week, INR came under pressure after government reported fiscal deficit of Rs 5.94 trillion for the April-September period or 95.3% of the budgeted target for the current fiscal year that ends in March 2019. The deficit was 91.3% of the full-year target during the same period a year ago. Indian Rupee depreciated by 0.19% against USD last week and appreciated by 0.91% against euro.
USD ended the week higher against major world currencies amid host of geopolitical issues and due to sharp fall in British pound and euro. However, USD came under pressure on Friday paring some of its early week gains after market downplayed the strong third-quarter U.S. economic growth. Following the U.S. GDP report, U.S. bond yields fell as a deeper look into the report signalled growth could be set for bumpy road ahead, as the tailwinds from President Donald Trump’s tax cuts wear off. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.67% on a week on week basis and is at a level of 96.36.
USD started the week on a higher note as pound and euro fell sharply on Monday and continued to remain under pressure throughout the week. Pound came under pressure amid growing uncertainty about the future of UK Prime Minister Theresa May, as Brexit talks remained at an impasse. Euro was under pressure on Monday as investors remained wary over the disagreement between Italy’s government and the EU over Italy’s 2019 draft budget, which the European Commission has rejected as a breach of EU laws.
British Pound depreciated by 1.90% against the USD last week after a report that Northern Irish Democratic Unionist Party, which props up Prime Minister Theresa May’s minority government, will support an amendment proposed by rebel Brexiteer lawmakers. This comes in the wake of rumours that May is set to face a leadership challenge, as her attempts to unlock Brexit talks by considering an extension to the transition period beyond the end date of December 2020.
British pound received some relief during the end of the week after reports surfaced that the UK Prime Minister Theresa had received the backing from members of her Conservative party, laying to rest, at least temporarily, a challenge to her leadership.
Euro depreciated by 0.96% against USD last week. European Union on Wednesday took the unprecedented step of rejecting Italy’s 2019 draft budget, amid concerns over the impact of increased spending on already high national debt levels. Italy’s government now has three weeks to resubmit a revised spending plan to Brussels.
The euro came under additional pressure on Thursday after the European Central Bank made no changes to its monetary policy, as expected, but the central bank could possibly extend its asset purchase program as its president, Mario Draghi, insisted in the post-decision press conference that accommodation remained necessary.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 10 bps, U.S. government bond yields have been under downward pressure for most of this week, due to worries about China economic growth and a lack lustre outlook for U.S. corporate earnings. A tit-for-tat policy between Beijing and the U.S. has added to worries that tariff disputes will eventually harm both the economies. Bond yields rallied sharply after major global stock exchanges fell dramatically on earning concerns. New home sales data suggest a slowing construction sector with new home sales dropping 5.5% in September, below market estimates of 0.6% drop, new home sales touched their lowest levels in nearly two years. New home sales have dropped for 4 consecutive months, as mortgage rates have risen recently.
The European Central Bank kept its policy unchanged and stayed on course to end bond purchases by the end of December and to raise rates next summer. ECB President Mario Draghi said he predicts inflation will rise towards the end of this year. Draghi said that while measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Looking ahead, underlying inflation is expected to pick up towards the end of the year and to increase further over the medium term.
Italy 10-year benchmark bond yields fell by 26 bps. Earlier, bond yields rose after the EU rejecedt its budget plan. EU had warned Italy to reduce the deficit in its 2019 draft budget to avoid heavy fines next year, but Italy populist government went ahead with a budget that has proposed a deficit equal to 2.4% of GDP. Deficit figure was too high for Italy as total government debt equals 131% of G.D.P, and technically more than double the eurozone limit.
Germany 10-year benchmark bond yields fell by 6 bps. Greece 10-year benchmark bond yields fell by 18 bps, Spain 10-year benchmark bond yields rose by 21 bps, Portugal 10-year benchmark bond yields fell by 15 bps.
Emerging economies 10-year benchmark bond yields were mix last week.
South Africa 10-year benchmark bond yields rose by 13 bps after a Finance Minister Tito Mboweni statement, Mboweni said government debt will peak 2 years later at a higher level than forecast. The fiscal gap will widen and state revenues will continue to undershoot. After the Mboweni statement, risk of credit rating downgrade has increased significantly, a credit downgrade would move its local-currency debt into junk territory.
Indonesia 10-year benchmark bond yields rose by 3 bps, Bank Indonesia kept its policy rate unchanged in its October policy meeting. The seven-day reverse repurchase rate was kept unchanged at 5.75%, in line with the market forecast. Deputy Governor Mirza Adityaswar said further action will depend on the outlook for the current-account deficit, inflation and the exchange rate.
Brazil 10-year benchmark bond yields rose by 5 bps, data released showed that Brazil economic activity registered a growth of 0.47% in August compared to July, making it the third consecutive monthly increase. Economic Activity Index grew by 2.5% in August compared to the same period last year. The activity level also registered gains of 3.45% in June and 0.65% in July, following a decline of 3.33% in May due to the truckers strike.
Australia 10-year benchmark bond yields fell by 12 bps, Russia 10-year benchmark bond yields rose by 4 bps, China 10-year benchmark bond yields fell by 3 bps.
US high-yield bond yields rose by 21 bps to 6.70% and Eurozone high-yield bond yields rose by 25 bps to 3.85%.