India’s 1st quarter of fiscal 2018-19 saw the BOP turn negative, which is leading to the sharp fall in the value of the INR. All indications are that the 2nd quarter too will see a weak BOP given high oil prices, rising trade deficit and weak capital flows. India’s fx reserves have fallen by USD 40 billion taking spot and forward positions.
The Indian rupee nose-dived against the USD last week, falling below the Rs 72 mark on Thursday the 6th of September, hitting a fresh record low of Rs 72.10 amid a persistent sell-off in emerging markets driven by worries over global economic growth. Indian Rupee has depreciated by around 13% so far this year and by 5% in the last one month. Indian Rupee depreciated by 1.04% against the USD last week and by 0.71% against the Euro.
USD ended last week on a higher note against all the major world currencies after exhibiting high volatility throughout the week. The demand for the USD was bolstered by the risk-off mood in markets amid fears over the impact on global growth from the Trump administration’s protectionist trade policies and strains in emerging markets. USD gained sharply on Friday after the release of a stronger U.S. jobs report and due to President Trump’s threat of fresh tariffs on China and Japan. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.24% on a week on week basis and is at a level of 95.37.
The better-than-expected jobs data increased the chances that the Federal Reserve will increase interest rates later this month. The U.S. economy added 201,000 jobs in August, above expectation for 191,000 new jobs, while the unemployment rate unexpectedly rose to 3.9%. Further, the Fed’s view that a tighter labour market would lead to wage growth, increasing inflationary pressures, was validated somewhat as average hourly earnings grew 0.4%, against the expectation for a 0.3% increase.
The trade war worries escalated during the week after President Trump threatened China with another round of punishing tariffs on Friday, saying he was prepared to tax essentially all Chinese goods imported into the United States if Beijing did not change its trade practices. The threat comes as the administration prepares to move forward with another round of tariffs on USD 200 billion worth of Chinese imports, including many everyday consumer products like electronics and housewares.
USD started the week on a steady note on Monday as concerns over global trade tensions and instability among emerging market currencies underpinned safe haven demand. USD demand remained strong on Tuesday after the release of solid U.S. economic data and on Argentine peso hitting a record low level as President Mauricio Macri vowed to employ “emergency” measures to resolve the crisis.
Argentina announced new austerity measures with the ultimate goal of eventually balancing the budget by next year. These measures include new taxes on exports and further cuts to government spending. The Macri government wants to speed up the release of a USD 50 billion loan from the International Monetary Fund (IMF).
Euro and British Pound were also victims of risk aversion and USD strength. British Pound had traded above GBP 1.30 on the back of positive Brexit comments from the EU but it gave up all of its gains to end the week in negative territory. British Pound depreciated by 0.31% against USD last week. British pound surged mid of the week after reports suggested that British and German governments have abandoned key Brexit demands, which investors hope could ease the path to a Brexit deal.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields rose by 7 bps after a strong US jobs data, US economy added more jobs than expected. Nonfarm payrolls grew by 201,000 in August 2018 while average hourly earnings rose 2.9% for the month on an annualized basis. Improvement in wages and payrolls can push Federal Reserve in the direction of more rate hikes. The market will also keep an eye on ongoing trade negotiations, U.S. and Canada officials are working to secure a new trade agreement to replace the current North American Free Trade Agreement (NAFTA) pact.
Eurozone Manufacturing PMI index fell to 54.6 in August, in line with flash estimates and down from July 55.1 reading. The indicator pointed to the slowest growth since November 2016.
Italy 10-year benchmark bond yields fell by 37 bps after its government moved to reassure the market that EU fiscal rules would be respected. Deputy Prime Minister Matteo Salvini said that the government will try to respect EU fiscal rules and honor pre-existing budget commitments
Germany 10-year benchmark bond yields rose by 5 bps, Greece 10-year benchmark bond yields fell by 10 bps, Spain 10-year benchmark bond yields were flat, Portugal 10-year benchmark bond yields fell by 1 bps.
Japan 10-year benchmark bond yields were flat. Bank of Japan board member Goushi Kataoka criticised the central bank decision to make policy framework more sustainable, Kataoka argued that it should have instead ramped up stimulus to achieve the inflation target.
Emerging economies 10-year benchmark bond yields were mixed last week.
South Africa 10-year benchmark bond yields rose by 16 bps. South Africa economy entered into a technical recession, GDP registered a decline of 0.7% in the second quarter of the year, following a first-quarter decline of 2.2%. In economic terms, a technical recession is described as two consecutive quarters of economic decline.
China 10-year benchmark bond yields rose by 5 bps, However, overseas investors are buying an increasing amount of yuan-denominated bonds despite the fact that the Chinese economy is facing some turbulence mainly because of trade tensions with the US. Foreign investors trusteeship of yuan-denominated bonds reached 1.41 trillion yuan ($206 billion) by the end of August, up by 44.96% compared with the end of last year.
Brazil 10-year benchmark bond yields fell by 5 bps, Brazilian economy accelerated slightly in Q2 despite a nationwide trucker’s strike. Q2 GDP grew by 0.2% QoQ and 1.0% YoY.
Australia 10-year benchmark bond yields rose by 8 bps, Russia 10-year benchmark bond yields rose by 49bps.
US high-yield bond yields rose by 9 bps to 6.28% and Eurozone high-yield bond yields rose by 12 bps to 3.51%.