The INR appreciated by 0.26% against the USD last week on the back of broad USD weakness and record high fx reserves. RBI has been buying USD in spot and forward markets on the back of strong FII flows that touched USD 25 billion in the January-July 2017 period.
RBI will weigh the strength of the INR in its policy review this week. We expect the RBI to cut rates by 50bps, while overall market consensus is a 25bps rate cut. However, FII flows will continue to keep the INR strong even if RBI cuts rates by 50bps. Growth for the Indian economy will outpace growth globally while inflation expectations are down, helping both Indian equities and bonds to do well.
USD continued its broad weakness against major world currencies last week. The weaker than expected U.S. GDP report and Federal Reserve’s monetary-policy announcement last week have weakened the expectations for any further rate hikes by the Fed this year. The Fed did exactly what the market anticipated, however that wasn’t enough to keep the USD steady. Fed left interest rates unchanged and acknowledged that inflation has declined and set the stage for reducing asset purchases in September by saying balance-sheet normalization will begin “relatively soon.” USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.64% on a week on week basis and is at a level of 93.26, a multi year low.
USD started the week on a low note amid ongoing concerns over political turmoil in Washington. White House spokesman Sean Spicer resigned on Friday, underlining concerns over the upheaval in the Trump administration. The failure to pass healthcare reform has dampened hopes for the passage of Trump’s other legislative efforts, such as overhauling the tax code and implementing fiscal stimulus. Hopes for tax reforms and fiscal stimulus under the Trump administration helped drive the USD to a 14-year high after the November election. The USD has now given up all of its post-election gains.
U.S. Commerce Department said new home sales rose by 0.8% to 610,000 units in the month of June against the expectations for a gain of 1.4% to 615,000 followed by New home sales of 605,000 in May.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 22th July rose by 10,000 to 244,000 from previous week’s total of 34,000 against the expectations of a rise by 7,000 to 241,000.
U.S. Commerce Department reported that durable goods orders rose by 6.5% last month against the expectation for a rise of 3.0%. However, core durable goods orders rose by 0.2% in the month of June against the expectations for a gain of 0.4%.
U.S. Bureau of Economic Analysis reported that gross domestic product rose 2.6% in the second quarter largely in line with the expectations and up from a 1.2% growth rate in the three months to March. First quarter GDP was revised to 1.2% from a previously estimated reading of 1.4% increase. The report also showed that the U.S. employment cost index ticked up 0.5% in the last quarter against the expectations for a 0.6% rise.
Euro appreciated by 0.44% last week against the USD as demand for the Euro continued to be underpinned by expectations that the European Central Bank is moving closer to tapering its bond-buying program. European Central Bank president Mario Draghi in post policy press conference said that policymakers would discuss changes to its bond-buying scheme in September as the Central Bank saw signs of “unquestionable improvement” in Eurozone growth.
Asian currencies were mixed against the USD last week. Australian Dollar appreciated by 1.10%, New Zealand Dollar appreciated by 0.19%, Japanese Yen appreciated by 0.41% against the USD and depreciated by 0.32% against the Euro. South Korean Won depreciated by 0.34%, Philippines Peso appreciated by 0.35%, Indonesian Rupiah depreciated by 0.08%, Indian Rupee appreciated by 0.26% against the USD and depreciated by 0.33% against the Euro, Chinese Yuan appreciated by 0.49%, Malaysian Ringgit depreciated by 0.03% and Thai Baht appreciated by 0.17%.