Indian Rupee was range bound last week ahead of the important RBI policy statement that will be released this week. Following the weakness in the INR, expectations are that the RBI could raise rates by 50bps in its policy meet on the 3rd and 4th of October. INR recovered in the later part of the week after falling on Monday after the announcement by the government to increase import tariffs on non-essential products to contain the current account deficit (CAD) and on selling of USD by exporters and banks. However, INR for the week, finished lower against the USD, posting its fifth straight weekly loss. Indian Rupee depreciated by 0.39% against the USD last week and appreciated by 1.22% against the euro.
USD ended the week higher against major world currencies last week. USD climbed to 13-month highs against the Japanese yen and renewed its rally versus the Swiss franc, euro, New Zealand and Australian dollars. USD surged higher as Federal Reserve hiked interest rates by 25 bps in its latest concluded FOMC meets and has given guidance for one more rate hike in 2018 followed by three more in 2019. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.97% on a week on week basis and is at a level of 95.13.
USD started the week on a lower note on Monday, largely pressured by strong pound and euro. British pound was strong amid hopes of a UK-EU Brexit deal, while euro was firm due to positive remarks from European Central Bank Mario Draghi. Further, the escalation of a trade war continued to weigh on market sentiments as the U.S. and China imposed fresh tariffs on each other’s imports a week prior.
China on Monday cancelled mid-level trade talks with the U.S. as well as a proposed visit to Washington by Vice Premier Liu He.
USD started to surge after the Federal Reserve raised interest rates by 25 bps to 2.25% on Wednesday, its third rate hike this year and its eighth since 2015. In its statement, the Fed said it still foresees another rate hike in December, followed by three more in 2019, and one additional increase in 2020.
The central bank dropped the word “accommodative” to describe its monetary policy stance in its statement, saying the change does not signal any change in the bank’s path toward normalizing monetary policy.
British Pound started the week on a positive note but ended the week lower against USD amid broad USD strength and as market participants remained pessimistic about prospects for Brexit negotiations between the UK and the European Union. However, the early week gain came on the back of positive comments from German officials which stoked investor optimism that the UK and EU would eventually reach an agreement on terms for Britain’s future relationship with the bloc.
Euro depreciated by 1.23% against USD last week despite upbeat assessment of the eurozone from European Central Bank President Mario Draghi, who also reiterated the central bank’s plan to end its massive bond-buying programme at year-end. However, the euro was hit hard on Friday after the newly elected populist government in Italy decided on a 2.4% deficit target for 2019.
Both the EU and the country’s finance minister had hoped to keep the budget deficit between 1.6% and 2% of GDP, but the coalition defied their wishes by agreeing on a much higher budget deficit. In response, Italian stocks collapsed and bond yields spiked. The euro fell sharply, as market participants believes that these moves will lead to more trouble for Italy.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 2 bps, after Fed Chair Jerome Powell said that he does not see a build-up in fundamental inflation and does not anticipate prices surprising on the upside.
Federal Reserve raised the federal funds rate by 25bps to 2%-2.25% during its September 2018 policy meeting, in line with market expectations, this is the 3rd rate hike in the year 2018, and it is the 8th time the Federal Reserve raised borrowing costs since it started in late 2015. The rate hike was expected as US economic growth is strong, Unemployment is low, and inflation is relatively stable.
Fed rate-hike outlook for the rest of 2018 and 2019 stayed the same as well. The central bank is expected to raise rates again in December and another three times next year. The Fed economic outlook has improved. GDP growth for 2018 is now expected to come in at 3.1%, up from the previous expectation of 2.8%.
European Central Bank President Mario Draghi said he expects a rise in eurozone consumer prices. Harmonized European inflation would likely hover around 1.7% every year until 2020 and 1.8% excluding food and energy in 2020. Draghi reiterated that ECB interest rates would remain at their current levels at least through the summer of 2019. Still, with inflation being a key for monetary policy, eurozone bond yields rose in response.
Germany 10-year benchmark bond yields rose by 1 bps, Greece 10-year benchmark bond yields rose by 11 bps, Spain 10-year benchmark bond yields rose by 1 bps, Portugal 10-year benchmark bond yields rose by 1 bps.
Italy 10-year benchmark bond yields rose by 33 bps after the Italian government targeted the budget deficit target at 2.4% of GDP. The economy minister Giovanni Tria initially wanted a deficit set as low as 1.6%, hoping to respect European Union demands, but Tria was in continuous pressure from the government two deputy prime ministers Luigi Di Maio, the leader of the anti-establishment Five Star Movement and Matteo Salvini, who heads the far-right League, to increase the target in order to full-fill election campaign promises.
Japan 10-year benchmark bond yields fell by 1 bps, minutes of BoJ policy suggest few members of BoJ voiced concern that tweaking its ultra-easy monetary policy could spark an unintended rise in interest rates, members warned that tweaking policy could allow the long-term yields to rise, which might lead to an increase in real interest rates, making it more difficult to lift inflation toward sthe central bank 2% target.
Emerging economies 10-year benchmark bond yields largely fell last week.
Brazil 10-year benchmark bond yields fell by 28 bps, Brazil central bank cut its forecast for economic growth and moved its 2019 inflation projection above target as Brazil is still suffering from May’s crippling truckers strike. In its quarterly inflation report, the bank forecast gross domestic product growth of 1.4%, down from 1.6% projection in June’s report. The bank forecast inflation ending 2018 at 4.4%, up from 4.2% predicted in June and closer to its 4.5% annual target for this year.
South Africa 10-year benchmark bond yields fell by 11 bps, Australia 10-year benchmark bond yields fell by 3 bps, Russia 10-year benchmark bond yields fell by 11 bps, China 10-year benchmark bond yields fell by 6 bps.
Indonesia 10-year benchmark bond yields rose by 2 bps, Bank Indonesia raised its benchmark policy rate by 25 basis points to 5.75%. The latest move took the country’s total interest rate hikes this year to 1.50% points. Central bank governor Perry Warjiyo said the rate hike was to strengthen the stability of the economy, especially the rupiah.
US high-yield bond yields fell by 1 bps to 6.20% and Eurozone high-yield bond yields rose by 3 bps to 3.38%.