Weekly Musings – Macro Quartet for the week ending May 10, 2024

14 May 2024 , 12:06 PM

GOLD, OIL AND RUPEE: TROIKA IN ACTION THIS WEEK

It was a week in which the 3 key financial variables; Brent Crude prices, USDINR exchange rate and gold prices were in the midst of action. While the rupee continued to weaken to a multi-week low, it was the oil prices that continued its sharp fall in the week. From a high of $90/bbl, Brent crude is now down to $82/bbl, a sharp fall of nearly 10% in the last 2 weeks. However, in the midst of all this melee, the one asset that attracted buying interest was gold, which bounced back sharply in the week. Here is the story in detail.

• For the week, crude oil in the Brent market fell to $82.79, after getting close to $90/bbl just about two weeks back. What has changed in the intervening period? It has a lot to do with the US inventories growing consistently for 3 weeks in a row. Oil prices have fallen sharply in tandem with the surge in non-OPEC supply. US and Canada have been churning out oil at record levels, and the supply impact is visible now.
• The rupee sharply weakened in the week to ₹83.553/$. It is rather surprising that the weakness in the USDINR has been visible despite the dollar index (DXY) being largely stable and the oil prices falling sharply. This fall in the rupee during the week can be largely attributed to the sharp spike in FPI selling. For the previous week ended May 10, 2024, the foreign portfolio investors have sold Indian equities to the tune of $2.18 Billion. That has put a lot of pressure on rupee, as has the strength in Asian currencies.
• Why did gold spike in the recent week to May 10, 2024. Remember, spot gold (XAU) had closed the previous week at $2,301/oz (One oz or troy ounce is roughly equivalent to 31.1035 grams). One view is that the Fed had hinted at 3 rate cuts in its policy statement last week and that led to hopes that the opportunity cost of holding gold would come down further. However, the real reason for the spike in gold appears to be more about the rising interest in gold among central banks. Many of the central banks including that of China, Turkey, Middle East, and India are adding to their gold reserves to reduce their dependence on the US dollar. That has been a key factor driving gold prices.

US BOND YIELDS EDGE UP; DOLLAR INDEX ALMOST FLAT

Two macro variables that set the tone for the global macros are the US bond yields and the US dollar index (DXY). Let us first look at the US 10-year bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 06, 2024	4.494	4.516	4.516	4.467
May 07, 2024	4.461	4.496	4.496	4.420
May 08, 2024	4.500	4.457	4.500	4.451
May 09, 2024	4.465	4.498	4.523	4.448
May 10, 2024	4.500	4.466	4.510	4.442

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.494%, but gradually edged up in the week to close at a level of 4.500%. During the week, the US 10-year bond yields touched a high of 4.523% and a low of 4.420%. Compared to the previous week, the US bond yields were in a very narrow range in the week to May 10, 2024. While the Fed statement had pushed the yields lower in the previous week, the yields bounced back in the latest week due to the speech by Neil Kashkari hinting at a possible rate hike, should inflation continue to remain sticky. While the Fed has not hinted at 2 rate cuts, there is still a lot of ambiguity on when and whether the rate cuts will commence in the year 2024.

In previous weeks, the CPI inflation reading and the Fed minutes had given clear indication that rate cuts would not happen till inflation convincingly showed hints of moving towards 2%. The speech in by Neil Kashkari in the recent week corroborated that point of view. Interestingly, Neil Kashkari hinted that the most likely scenario was rates staying at the current levels till the end of 2024. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 06, 2024	105.15	105.17	105.20	104.87
May 07, 2024	105.43	105.15	105.45	105.03
May 08, 2024	105.52	105.43	105.64	105.39
May 09, 2024	105.22	105.52	105.74	105.20
May 10, 2024	105.31	105.22	105.40	105.14

Data Source: Bloomberg

The dollar index had a relatively flat week once again, but edged lower in the last 3 days of the week. It started the week on a steady note, opening at the 105.15 levels but closed lower at 105.31 levels, after traversing a peak level of 105.52 in the middle of the week. During the week, the dollar index scaled a high of 105.74 and a low of 104.87. For the week, the dollar index closed tepid, but sharply lower than Wednesday. Dollar index is now trading well short of the psychological 107 levels; a level which has been crossed only 3 times in the last 40 years. The dollar index (DXY) is now well below that level.

INDIA BOND YIELDS EDGE LOWER TO 7.127%

For the second week in a row, the bond yields trended lower in the latest week to May 10, 2024. This week, bond yields fell from 7.149% to 7.127%. The yields have fallen over 7 basis points in last 2 weeks

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 15, 2024	7.175	7.193	7.193	7.160
Apr 16, 2024	7.193	7.193	7.200	7.185
Apr 17, 2024	7.193	7.193	7.200	7.185
Apr 18, 2024	7.180	7.170	7.187	7.155
Apr 19, 2024	7.225	7.206	7.233	7.197
Apr 22, 2024	7.192	7.241	7.242	7.188
Apr 23, 2024	7.167	7.184	7.184	7.163
Apr 24, 2024	7.186	7.175	7.190	7.160
Apr 25, 2024	7.204	7.193	7.206	7.188
Apr 26, 2024	7.199	7.238	7.238	7.188
Apr 29, 2024	7.196	7.185	7.203	7.176
Apr 30, 2024	7.195	7.199	7.205	7.185
May 01, 2024	7.195	7.199	7.205	7.185
May 02, 2024	7.162	7.170	7.173	7.159
May 03, 2024	7.149	7.160	7.163	7.147
May 06, 2024	7.108	7.132	7.132	7.106
May 07, 2024	7.129	7.115	7.135	7.109
May 08, 2024	7.138	7.138	7.144	7.130
May 09, 2024	7.135	7.148	7.148	7.125
May 10, 2024	7.127	7.124	7.129	7.111

Data Source: RBI

During the week, the bond yield opened at 7.108% and closed at 7.127%. In the last six weeks, the benchmark Indian bond  yields spiked from 7.014% to 7.225%; but tapered in the last 3 weeks; from 7.225% levels to 7.127%. The India bond yields are approximately reflecting the fall in the US bond yield and the possibility that the Fed might actually consider pre-emptive rate cuts much earlier than what the CME Fedwatch may be suggesting. The RBI and the Fed have rate cuts on their agenda; and most likely it could be pre-emptive. The falling bond yields are reflecting the possibility that the RBI could also surprise on rate cuts, when the markets are least expecting it. During the week, the India 10-year bond yields touched a high of 7.148% and a low of 7.106%.

RUPEE CLOSES AT 83.553/$; LOWEST LEVEL IN 4 WEEKS

With the dollar index steady around 105 levels, and the crude oil prices falling sharply to nearly $82/bbl, the rupee should have strengthened. However, the rupee weakened, largely on account of the sharp sell-off by the FPIs. The likelihood of weak monsoons is also playing truant with the rupee, as inflation is likely to be higher.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Apr 15, 2024	83.484	83.481	83.544	83.413
Apr 16, 2024	83.637	83.534	83.700	83.469
Apr 17, 2024	83.650	83.673	83.747	83.589
Apr 18, 2024	83.530	83.590	83.605	83.487
Apr 19, 2024	83.358	83.548	83.721	83.362
Apr 22, 2024	83.360	83.423	83.457	83.306
Apr 23, 2024	83.269	83.384	83.407	83.260
Apr 24, 2024	83.319	83.280	83.362	83.257
Apr 25, 2024	83.310	83.338	83.402	83.255
Apr 26, 2024	83.400	83.268	83.422	83.267
Apr 29, 2024	83.410	83.385	83.513	83.352
Apr 30, 2024	83.450	83.459	83.537	83.397
May 01, 2024	83.455	83.474	83.532	83.446
May 02, 2024	83.435	83.430	83.503	83.401
May 03, 2024	83.382	83.404	83.474	83.316
May 06, 2024	83.475	83.380	83.603	83.380
May 07, 2024	83.470	83.468	83.516	83.433
May 08, 2024	83.462	83.466	83.535	83.449
May 09, 2024	83.462	83.465	83.537	83.442
May 10, 2024	83.553	83.462	83.576	83.454

Data Source: RBI

The last time the rupee touched a low of ₹83.650/$, was about 4 weeks back when the FPIs had been net sellers to the tune of $2.23 Billion. In the latest week to May 10, 2024, the FPIs were net sellers to the tune of $2.18 Billion and, hence, it was hardly surprising that the USDINR closed the week at a 4-week low of ₹83.553/$. The Indian rupee has now been above 83/$ for 8 weeks in a row. FPIs have been persistent sellers in recent weeks on account of rising VIX and a fresh wave of political uncertainty in the economy.

BRENT CRUDE EDGES LOWER TO $82.79/BBL

The lates week was relatively steady after the sharp fall in the previous week. Last week, Brent crude fell from $89.37/bbl to $82.83/bbl as US inventories spiked much faster than expected. This week, Brent just edged lower to $82.79/bbl.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Apr 15, 2024	90.10	90.95	91.05	88.73
Apr 16, 2024	90.02	90.43	90.84	89.41
Apr 17, 2024	87.29	90.11	90.17	87.13
Apr 18, 2024	87.11	87.42	87.80	86.09
Apr 19, 2024	87.21	87.07	90.75	86.20
Apr 22, 2024	87.00	87.07	87.26	85.79
Apr 23, 2024	88.42	87.20	88.51	86.03
Apr 24, 2024	88.02	88.45	88.86	87.65
Apr 25, 2024	89.01	87.89	89.31	87.31
Apr 26, 2024	89.37	89.24	89.85	88.81
Apr 29, 2024	88.40	89.22	89.29	88.11
Apr 30, 2024	87.86	88.41	88.79	87.46
May 01, 2024	83.44	85.80	85.89	83.29
May 02, 2024	83.67	83.59	84.44	83.05
May 03, 2024	82.83	83.94	84.39	82.81
May 06, 2024	83.60	83.24	83.83	82.78
May 07, 2024	82.99	83.74	83.82	82.42
May 08, 2024	83.58	83.02	83.82	81.71
May 09, 2024	83.88	83.79	84.33	83.45
May 10, 2024	82.79	84.21	84.53	82.70

Data Source: Bloomberg

After the sharp fall in Brent crude last week, oil was steady in the current week. US inventories continued to spike for the third week in a row. For the week, Brent crude touched a high of $84.53/bbl and a low of $81.71/bbl.

SPOT GOLD BOUNCES TO $2,360/OZ THIS WEEK

The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Apr 15, 2024	2,382.51	2,343.86	2,387.59	2,324.59
Apr 16, 2024	2,382.83	2,382.86	2,398.34	2,362.95
Apr 17, 2024	2,360.81	2,383.20	2,395.63	2,354.84
Apr 18, 2024	2,378.25	2,360.74	2,392.84	2,360.70
Apr 19, 2024	2,390.45	2,378.60	2,417.79	2,372.96
Apr 22, 2024	2,326.29	2,388.20	2,388.72	2,325.29
Apr 23, 2024	2,321.81	2,326.62	2,334.48	2,291.40
Apr 24, 2024	2,315.82	2,322.19	2,337.16	2,311.90
Apr 25, 2024	2,331.78	2,316.20	2,344.86	2,305.28
Apr 26, 2024	2,338.72	2,332.16	2,352.62	2,326.30
Apr 29, 2024	2,334.44	2,337.50	2,346.85	2,320.08
Apr 30, 2024	2,284.57	2,335.10	2,336.54	2,284.94
May 01, 2024	2,317.88	2,285.91	2,328.40	2,281.66
May 02, 2024	2,303.29	2,319.89	2,326.57	2,285.58
May 03, 2024	2,301.89	2,304.27	2,320.52	2,277.60
May 06, 2024	2,326.15	2,293.98	2,331.98	2,291.91
May 07, 2024	2,315.20	2,326.31	2,329.98	2,310.10
May 08, 2024	2,309.05	2,315.40	2,321.43	2,303.74
May 09, 2024	2,345.88	2,309.04	2,347.59	2,306.67
May 10, 2024	2,360.14	2,346.26	2,378.45	2,345.25

Data Source: Bloomberg

The price of gold did taper after touching a high of $2,400/oz. However, this week, gold bounced from $2,301.89/oz to $2,360.14/oz. There is still a lot of central bank appetite for gold; which is likely to keep gold prices buoyant. Spot gold prices had fallen in previous weeks due to likely delays in rate cuts, which would have reduced the opportunity cost of holding gold. However, with dollar uncertainty, interest was back in the yellow metal!