Last week the currency market globally exhibited high volatility largely due to the rising concern over U.S.-China trade war. The trade war concerns are driving market participants into risk-off mode, which is helping the safe-haven yen to rise. Japanese Yen appreciated by 0.63% against USD last week. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.28% on a week on week basis and is at a level of 94.52.
However, downside in the USD seems to be limited by a weaker euro amid political uncertainty due to dispute in Germany’s governing coalition, while the prospect of a prolonged period of low interest rates in the euro-area continued to weigh on the single currency.
Market sentiment deteriorated as concerns over trade wars revived after U.S. President Donald Trump announced tariffs on USD 50 billion of Chinese imports on Friday, prompting Beijing to respond in kind, adding to fears over the outlook for global growth.
The fear of full-blown trade war came to the fore on Tuesday as China vowed to retaliate to the latest trade salvo from the White House after Trump had further threatened to impose a 10% tariff on additional USD 200 billion worth of Chinese goods.
Increasing prospects for a full-blown US-China trade war triggered weakness in emerging market currencies. (Read our analysis on However, Indian rupee appreciated by 0.27% against USD last week despite trade war worries and rising crude oil prices. The OPEC members agreed to raise output, but by an amount that appears to be less than anticipated. Further, the OPEC has given opaque targets for the increase, making it difficult to understand how much more it will pump. Oil prices surged as much as 5% on Friday.
The domestic currency market sentiment improved after witnessing volatility in the early part of the week as the Reserve Bank of India’s June meeting minutes signalled that the central bank will rely on data for future rate hike decisions.
India’s widening twin deficit, and foreign institutional investor (FIIs) outflows have contributed to the recent weakening of the rupee against the USD.
USD started the week on a slightly higher note as demand for USD remained underpinned due to diverging monetary policy outlook between the U.S. and Europe. The USD index (DXY) rose by 1.29% week prior to last, its best weekly performance in seven weeks after a hawkish Federal Reserve pointed to a faster pace of monetary tightening this year while the European Central Bank gave a dovish signal.
The euro remained under pressure earlier this week after European Central Bank President Mario Draghi reiterated that monetary policy will remain persistent, prudent and patient. While, the demand for the USD continued to be underpinned after Federal Reserve Chairman Jerome Powell on Wednesday reiterated that the case for gradual rate hikes remains strong.
Euro recovered in the later part of the week as it pared all its losses against USD and posted a gain of 0.35% against USD last week. The gain came after the release of better than expected composite eurozone purchasing managers index survey readings. French and German business activity in June came in higher than expected, easing concerns of a slowdown in the eurozone.
British pound depreciated by 0.13% against USD last week after Bank of England left interest rates on hold, but a surprise vote for a rate hike by the bank’s chief economist boosted the expectation for the next hike in the August meeting. Further, the pound found some support after British Prime Minister Theresa May won a crucial parliamentary vote on the EU withdrawal bill. Had the vote not passed it would have potentially given lawmakers the power to stop Britain leaving the EU without a deal.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 2bps as trade war fears escalated after US President Donald Trump threatened to impose a 10% tariff on another 200 billion dollars worth of Chinese goods and tariff of 20% on all automobile imports from Europe.
China commerce ministry described the threat as blackmail and said Beijing would fight back with qualitative and quantitative measures.
Recently heads of several major central banks (Fed, ECB, BoJ, and BoE) expressed alarm over the growing trade tensions in the world and warned it may push the global economy into the ditch. Fed chair Jerome Powell said there is raising concern from business leaders on trade friction, Powell said, for the first time the central bank business contacts are talking about postponing hiring and investment decisions.
Italy 10-year benchmark bond yields rose by 9 bps after Italian government appointed two eurosceptics (Alberto Bagnai & Claudio Borghi) to head key finance committees. Borghi is against austerity and balanced-budget policies. Borghi has called for the issuance of short-term government bonds known as mini-Bots, to pay companies and individuals owed money by the state.
Germany 10-year benchmark bond yields fell by 7 bps, Spain 10-year benchmark bond yields rose by 6 bps, Portugal 10-year benchmark bond yields fell by 2 bps. Greece 10-year benchmark bond yields fell by 33 bps.
Japan 10-year benchmark bond yields were flat. Japan core consumer inflation held steady in May from the previous month, which again highlighted the challenge faced by the central bank, as over five years of massive stimulus has failed to push prices close to its 2% goal. The subdued inflation is also another reason why the Bank of Japan is taking some time before exiting its ultra-easy money policy.
Emerging economies 10-year benchmark bond yields were mixed last week.
Brazil 10-year benchmark bond yields rose by 1 bps Brazil’s central bank maintained its key interest rate at 6.5%, as inflation in Brazil is under control despite the strong depreciation of the real and a costly truckers’ strike. Central bank said that inflation would spike following the strike, which saw shop shelves and factories starved of deliveries, driving up prices. However, this inflationary rise will be temporary.
Russia 10-year benchmark bond yields fell by 8 bps, Russia economic recovery continued in May as retail sales kept on rising while unemployment levels reached record lows. Retail sales rose 2.4% in May 2018 YoY basis, while unemployment rate dipped to 4.7 percent in May, a level last seen at the time of the Soviet Union’s collapse in the early 1990s
South Africa 10-year benchmark bond yields fell by 4 bps, Indonesia 10-year benchmark bond yields rose by 22 bps, China 10-year benchmark bond yields fell by 4 bps
US high-yield bond yields rose by 3 bps to 6.15% and Eurozone high-yield bond yields rose by 3 bps to 3.35%