RBI’s MPC (Monetary Policy Committee) will meet for the first time in the history of the central bank to decide on policy. The meeting is scheduled for the 3rd and 4th of October with the policy decision to be announced at 2.30 pm on the 4th of October. The policy decision hangs in balance as the MPC weighs many factors. Read out report on RBI Policy Decision Hangs in Balance.
The INR appreciated against the USD last week as markets weighed positive macro factors of falling inflation expectations, low CAD and manageable fiscal deficit. The INR held ground despite volatility on the back of Indo-Pak tensions. The outlook for the INR is positive as the MPC specifically targets inflation and that will keep India’s overall macros in good health. However contagion effects of a Deutsche Bank collapse or increased tensions in the Indo-Pak standoff could cause volatility to the INR despite strong internal fundamentals.
Last week was supposed to be a quiet week for currency markets after the conclusion of Fed FOMC & BoJ policy meet but OPEC’s decision to cut oil production for the first time in 8 years and the brewing banking crisis in Europe, markets globally witnessed a sharp increase in volatility. Market participants are digesting the Federal Reserve’s potential rate hike at the end of the year and are weighing the significance of stronger consumer confidence, service sector activity, durable goods and GDP data. These reports strengthen the case for a December rate hike even as personal income and spending growth slowed. However, if Europe’s banking troubles escalate, the strain that it puts on financial markets may make it difficult for the Federal Reserve to raise rates. USD Index (DXY), which tracks the movement of the USD against six major currencies, declined by 0.01% on a week on week basis and is at a level of 95.46.
USD started the week on low note as it declined against major currencies and weakened by 0.26% against Japanese Yen on Monday after comments from a top Bank of Japan (BOJ) official reinforced views that the central bank was unable to weaken the Yen. The first U.S. presidential debate also brought in some amount of uncertainty to the USD .
BOJ Governor Haruhiko Kuroda said on Monday that the central bank stood ready to use every possible policy tool to achieve its 2% inflation target. He also said no big increase or decrease to its bond buying was expected for now, which eased speculation that the BOJ was considering tapering asset purchases and supported a view that the BOJ was keeping in place a monetary policy that has only led the Yen to strengthen. Japanese Yen on weekly basis depreciated by 0.33% against USD.
The sentiment over USD slightly improved on Tuesday after the conclusion of the first U.S. presidential debate in which market participants considered that Hillary Clinton did better than her rival Donald Trump. Markets tend to see Clinton as a status quo candidate, while market is unsure what a Trump presidency might mean for international trade deals or the U.S. economy.
The positive sentiment received further boost on Wednesday after Federal Reserve Chair Janet Yellen told Congress that the central bank does not have a “fixed timetable” for modifying its monetary policy. Yellen also added that the continued job creation at its current pace would cause the economy to overheat and, in that case, the Fed could be forced to raise rates faster than expected.
U.S. Conference Board on Tuesday said that its consumer confidence index increased to 104.1 in September from a reading of 101.8 in August against the expectation for the index to slip to 99.
U.S. Commerce Department on Wednesday reported that the durable goods orders remained unchanged in the month of August against the expectations for a 1.4% decline following a rise of 3.6% in July. Core durable goods orders, which exclude volatile transportation items, fell by 0.4% in the month of August, which was largely in line with expectations.
U.S. official data showed that the third estimate of U.S. second quarter gross domestic product showed growth of 1.4%, which was revised from the previous reading of a 1.1% expansion against the expectation of a growth rate of 1.3%.
U.S. Department of Labour on Thursday reported that number of individuals filing for initial jobless benefits rose by 3,000 in the week ended 24th September to 254,000 for the previous week’s total of 251,000 against the expectation of a rise of 9,000 to 260,000.
U.S. National Association of Realtors Thursday reported that its pending home sales index fell by 2.4% to 108.5 in the month of September, missing the expectations for an increase of 0.3%. The index reading at 108.5 is the second lowest this year after January’s 105.4.
U.S. Commerce Department on Friday reported that personal spending was unchanged in the month of August from the previous month and was below the expectations for a 0.1% rise, followed by a gain of a 0.4% in July.
Asian currencies were largely up against the USD last week as most of the commodity linked currencies gained after OPEC said that the producing group agreed to reduce its oil output. The agreement marked the first time the group cut its oil output since 2008. Currencies of countries that rely heavily on energy or raw material exports, such as the Russian Ruble, Norwegian Krone, Canadian Dollar and Australian dollar, gained against USD after the report. The gains largely tracked a rally in oil prices, which gained more than 5% after the announcement while on weekly basis the gain was limited to 1.59%.
Australian Dollar appreciated by 0.54%, New Zealand Dollar appreciated by 0.76%, Japanese Yen depreciated by 0.33% against the USD and by 0.48% against the Euro. South Korean Won appreciated by 0.12%, Philippines Peso depreciated by 0.88%, Indonesian Rupiah appreciated by 0.30%, Indian Rupee appreciated by 0.07% against the USD and by 0.44% against the Euro, Chinese Yuan depreciated by 0.04%, Malaysian Ringgit depreciated by 0.6% and Thai Baht appreciated by 0.16%.