The European Central Bank (ECB) on Thursday the 22nd of January 2015, announced that the bank will make monthly purchases of government bonds, asset backed securities and covered bonds for Euro 60 billion (USD 69 billion), starting March 2015 and continue until September 2016. The move came after the Eurozone inflation turned negative in December 2014. ECB’s decision brought down Euro to more than 11 year low levels against the USD and 3 month lows against the Japanese Yen. Euro on weekly basis depreciated by 2.90% against the USD and by 18% on yearly basis.
Indian Rupee appreciated by 0.71% against the USD on the back of strong rally in the Sensex and Nifty that closed at record highs post the ECB bond purchase announcement. On weekly basis FIIs bought shares worth USD 930.99 million and debt worth USD 651.72 million, as per SEBI data.
The USD index closed at over ten year highs at 94.99 levels, on the back of Euro weakness. The Fed is likely to raise policy rates post April 2015 even as ECB is loosening policy leading to USD strength.
The question is will the INR depreciate due to a broad USD strength and weakening Euro or will it stay stable and even appreciate against the USD on the back of rising capital flows as ECB pumps in cheap liquidity into the system?
The INR is more likely to gain strength on the back of markets resorting to cheap Euro liquidity to fund investments in higher yielding currencies. ECB policy rates at 0.5% and discount rate at -0.2% will stay for at least a couple of years more and that will spur buying in bonds and equities of countries like India where macros of fiscal and current account deficits and inflation are steadily improving.
Strong capital flows will improve Balance of Payment (BOP) position leading to rising foreign exchange reserves (fx) that touched record highs of USD 322 billion on the 16th of January. The INR will stay stable or even strengthen against the USD on the back of rising fx reserves.
USD index climbed to over ten year levels despite weak U.S. housing and manufacturing reports. U.S. existing home sales rose by 2.4% in December to 5,040 million against expectations of 5,060 million, whereas in November it was at 4,920 million. Markit report showed that U.S. flash manufacturing purchasing managers’ index fell to 53.7 this month from 53.9 in December against expectations of 54.0 rise.
US Jobless claims for the week ending 17th January fell by 10,000 to 307,000 from the previous week’s revised total of 317,000, against expectations of 6,000 decline. The decline in claims indicate continuous improvement in US labour market.
Real continued its previous week rally and appreciated by 1.35% in the last week against the USD as ECB announced its bond-buying program. However on Friday, the currency depreciated by 0.4% paring its weekly gain as data showed that Brazil deficit in the current account had widened to USD 10.3 billion in December against expectations of USD 9.7 billion. Real was under pressure in 2014 and depreciated by around 11% because of economy slowdown and a widening budget deficit.
Russian Ruble appreciated by 2.03% against the USD, paring its yearly decline to 46.74%. Ruble strengthened as the sentiment towards Ruble changed after ECB announced its bond buying program, as foreign investors are expected to take advantage of high Russian interest rates. Ruble on Friday was also supported by higher prices of oil.
Asian currencies showed mixed trend on weekly basis against the USD. Philippines Peso rose by 0.62%, Indonesia Rupiah rose by 0.45%, Indian Rupee rose by 0.73%, whereas Australian Dollar declined by 3.62%, Japanese Yen declined by 0.19%, South Korean Won declined by 0.63%, Chinese Yuan declined by 0.34% and Thai Baht declined by 0.1%.
Philippine Peso, Indonesia Rupiah and Indian Rupee rallied the most in Asia this week due to ECB stimulus program, which is expected to boost fund flows to higher-yielding emerging-market assets.
Australian Dollar this week dipped below 80 US cents for the first time since July 2009 after ECB stimulus program. Australian Dollar saw highest level of 95.02 US cents in June 2014 and has since then followed a downward trajectory due to falling commodity prices and due to a stronger US dollar. Week Australian dollar is good for its exporters whereas it makes country’s imports expensive.
Chinese Yuan depreciated by 0.34% against the USD on weekly basis as ECB stimulus program puts pressure on Yuan against USD as the country resorts to stimulate its economy. In November 2014 People’s Bank of China cut interest rate for the first time in two years.