Indian Rupee appreciated to over 18 months highs against the USD last week and is now on a strong footing after the Fed guided for gradual rate hikes and Modi government got an overwhelming victory in the Uttar Pradesh State Elections. Economic fundamentals are expected to improve with the hope that the government will accelerate its economic development agenda. A stronger economy will attract more foreign funds to India. Falling oil prices have also supported the INR strength. Rising inventory levels in the US on account of a surge in shale oil has resulted in oil prices slipping.
USD started the week on a positive note ahead of Fed FOMC meet after posting its worst three days of losses since early December largely on account of profit taking. Further, political risks in Europe at the start of the week supported the USD.
However, in contrast to the wide expectations, USD tanked after the Federal Reserve raised interest rates by 25bps in its recently concluded FOMC meet as market participants started to unwind their long USD positions after Fed Chair Janet Yellen sounded less hawkish and stuck to the guidance of gradual interest rate hikes. Fed is expected to hike rates twice this year. The market expressed its view by selling USD while 10-year Treasury yields fell 10bps to 2.5% and S&P 500 climbed to record highs. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.94% on a week on week basis and is at a level of 100.30.
The Fed is still the only major central bank planning to raise interest rates but it’s going to be a few weeks before there’s enough data to convince the Central Bank that whether June is the right time to tighten instead of September.
University of Michigan reported that consumer sentiment rose to 97.6, from 95.7 in the previous month against the expectation to rise to 97. Industrial production remained unchanged at 0.0%, from -0.1% in the previous month against the expectation to rise 0.2%.
U.S. Census Bureau reported on Thursday that the number of housing starts rose to 1.288M, from 1.251M in the previous month against the expectation to rise to 1.26M.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 11th March rose by 2,000 to 241,000 from previous week’s total of 243,000 against the expectation of a fall of 3,000 to 240,000.
Euro appreciated by 0.61% against USD last week. The strength in Euro came not only because of broad weakness in USD but also due to ECB being unexpectedly hawkish in its monetary policy announcement which has heightened the expectations that the European Central Bank is moving towards winding back its stimulus programme. ECB member Nowotny said a rate hike may soon be needed.
British pound appreciated by 1.88% against USD last week. Bank of England kept rates on hold but gave hints in voting results and in minutes that it might raise interest rates soon. Outgoing BoE policymaker Kristin Forbes unexpectedly voted for a rise in interest rates, and others signalled it would not take much for them to follow suit.
Asian currencies were up last week on broad USD weakness. Australian Dollar appreciated by 2.15%, New Zealand Dollar appreciated by 1.36%, Japanese Yen appreciated by 1.85% against the USD and by 1.24% against the Euro. South Korean Won appreciated by 2.26%, Philippines Peso appreciated by 0.21%, Indonesian Rupiah appreciated by 0.23%, Indian Rupee appreciated by 1.73% against the USD and by 0.45% against the Euro, Chinese Yuan appreciated by 0.09%, Malaysian Ringgit appreciated by 0.39% and Thai Baht appreciated by 1.38%.