RBI is likely to maintain rates status quo in its policy meet this week and will remove the “upward bias” outlook on inflation. RBI will shrugh off the weak 4th quarter GDP data, which was affected by demonitization, and term it as transitory. The INR will strengthen on RBI’s guidance of higher growth and stable inflation. Read our note on RBI Policy to be bullish for bond yields.
USD ended the week lower as market participants digested the release of weaker than expected U.S. economic data especially the monthly jobs report. U.S. policymakers haven’t said anything to cast doubt on the market’s rate-hike expectations with Fed Funds Futures showing high probability of hike rate in June. Even if the Fed hikes it is highly unlikely that it will give strong guidance for faster pace of tightening given the lack of progress on tax cuts and on the fiscal spending front – two factors that are crucial to ongoing optimism for the Fed. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.75% on a week on week basis and is at a level of 97.44.
USD started the week flat after data released in prior to last week showed that the U.S. economy slowed less than initially thought in the first three months of the year. Gross domestic product grew at an annual rate of 1.2% in the three months to March up from an initial estimate of 0.7%.
Commerce Department reported that consumer spending, which accounts for roughly 70% of U.S. economic activity, rose 0.4%, largely in line with the expectation. The Consumer Confidence Index fell to 117.9, against the expectations for a rise to 119.8.
National Association of Realtors reported that U.S. pending home sales fell by 1.3% in the month of April against the expectation of a rise of 0.5%, followed by a decline of 0.9% in March. It was the second consecutive month of soft pending home sales data.
Payroll processing firm ADP reported that non-farm private employment rose by 253,000 in the month of May against the expectation for an increase of 185,000.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 26th May rose by 13,000 to 248,000 from previous week’s total of 235,000 against the expectations of a rise of 4,000 to 239,000.
Institute for Supply Management reported that U.S. manufacturing activity ticked higher, hitting 53.5 in the month of May against the expectation of 52.8.
U.S. spending in the construction sector fell by 1.4% in the month of April, the biggest drop in a year, and against the expectation of a 0.2% decline.
U.S. Labour Department on Friday reported that U.S. economy added 138,000 jobs in the month of May, against the expectation of 185,000 jobs while the unemployment rate fell to a 16-year low of 4.3%.
Euro appreciated by 0.86% against USD last week hitting a 6-month high despite weaker-than-expected Eurozone data. According to the latest reports, economic confidence in the Eurozone, inflation and retail sales in Germany declined over the past month, a sign of the pressure created by a stronger Euro. Further, European Central Bank President Mario Draghi said that inflation in the euro area remains subdued and still requires substantial stimulus.
Asian currencies were largely mixed last week against the USD. Australian Dollar depreciated by 0.07%, New Zealand Dollar appreciated by 1.15%, Japanese Yen appreciated by 0.84% against the USD and depreciated by 0.06% against the Euro. South Korean Won depreciated by 0.09%, Philippines Peso appreciated by 0.52%, Indonesian Rupiah depreciated by 0.16%, Indian Rupee appreciated by 0.01% against the USD and depreciated by 0.09% against the Euro, Chinese Yuan appreciated by 0.67%, Malaysian Ringgit depreciated by 0.27% and Thai Baht appreciated by 0.01%.