Weekly Musings – Macro Quartet for the week ending April 19, 2024

22 Apr 2024 , 09:36 AM

CAN THE YUAN BE THE NEXT DOLLAR?

In the last few weeks, there are two things that China has done, which has put some pressure on US policy makers to come up with an alternate course of action. Firstly, China has been selling US treasuries quite aggressively in order to reduce its dollar holdings. China is the biggest holder of US dollar debt. Secondly, Chinese central bank (PBOC) has been aggressively buying gold, one of the key reasons for the rally in gold. So, does China fancy the Yuan as the next dollar in global markets. That is unlikely for 5 reasons.

• Unlike the US, which was a central player in global geopolitical and economic policy since the start of the twentieth century, China does not have the same level of acceptability among other nations. That will be a roadblock.
• Unlike the US dollar, the Chinese Yuan is not yet a freely floating currency. While the Yuan is called a free currency, the range is still regulated by the government through the central bank. Till that continues, Yuan will not qualify as a hard currency.
• There are many people in the world who are unwilling to accept the Yuan as an alternate to the dollar. While Russia may be willing to accept that shift, most of the US and EU allies, as well as India, will not be willing for such an arrangement.
• Even today, the US dollar is the currency of choice for almost 70% of the world trade, which gives the US dollar the exorbitant privilege. That sort of privilege does not exist for China as is less than 5-7% of world trade.
• For now, China has a huge banking problem to contend with and in the last many years, neither the Euro, nor the Yen have been able to dislodge the dollar.

While Chian might still make some noises, it is far from being the next reserve currency. Also, the more it sells US treasuries, China as the biggest holder will be a major loser.

RATE CUTS RULED OUT FOR NOW

If you read the gist of what some of the key FOMC members like Mester, Bostic and Neil Kashkari spoke last week, rate cuts are not happening in a hurry. In fact, even the CME Fedwatch is now reconciled to just about 1 rate cuts in this year with less than 50% probability of 2 rate cuts. The Fed members are almost unanimous that with inflation nearly 150 bps off the 2% target, rate cuts were really not an option now. The best the US Fed would do to please the doves is to keep the rates at the current levels for a longer period of time. A lot will depend on the Q1 GDP data and the PCE inflation data expected to be announced in the coming week. If these data points also hint at robustness in growth and high prices; then rate cuts are ruled out for the foreseeable future. The Fed has indicated that the rate cuts could commence in September, but it looks very unlikely there would be more than 1 rate cut this year, especially considering the geopolitical situation in West Asia and the possible impact on crude oil prices and resultant inflation.

US BOND YIELDS EDGE HIGHER; DOLLAR INDEX STAYS FLAT

Two macro variables that set the trend 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 (%)
Apr 15, 2024	4.610	4.534	4.663	4.520
Apr 16, 2024	4.669	4.614	4.696	4.591
Apr 17, 2024	4.589	4.674	4.684	4.575
Apr 18, 2024	4.637	4.587	4.653	4.561
Apr 19, 2024	4.623	4.627	4.635	4.496

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.60%, but picked up traction to touch a high of 4.685% during the week before closing the week at 4.623%. This bullishness in the bond yields was seen ever since the Fed minutes ruled out any rate cuts. In recent weeks, the CPI inflation in the US came in 30 bps higher and FOMC members appear to be against any rate cuts in the near future. This week, the Fed speeches delivered by Bostic, Mester and Neil Kashkari had a singular undertone; it is still too early for rate cuts. That kept the US bond yields under pressure.

In the previous week, the CPI inflation reading and the Fed minutes gave a clear indication that rate cuts would not happen till inflation convincingly showed hints of moving towards 2%. The ambivalence of the FOMC members is pushing bond yields higher. Also, there is selling on US bonds after repeated disappointments on the rates front. A lot will predicate on next week data, when the US first quarter GDP and March PCE inflation are announced. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 15, 2024	106.20	105.96	106.25	105.84
Apr 16, 2024	106.34	106.20	106.52	106.07
Apr 17, 2024	105.96	106.34	106.44	105.87
Apr 18, 2024	106.18	105.96	106.19	105.74
Apr 19, 2024	106.12	106.18	106.35	105.85

Data Source: Bloomberg

The dollar index had a relatively flat week. It started the week on a steady note, opening at the 106.20 levels but closed almost flat at 106.12 levels. The dollar index had spiked from 104 to 106 levels in the previous week, so this week was going to be subdued. That means the Fed would ideally wait for the inflation to give more clear signals that it was going towards 2%; before taking any action. For the week, the dollar index closed at the highest point of the day, with the bond yield rally making the dollar index stronger against most of the global hard currencies. Dollar index is just short of the psychological 107 levels.

INDIA BOND YIELDS STAY ELEVATED AT 7.225%

For the third week in a row, Indian benchmark 10-year bond yields closed higher. This week, bond yields rallied from 7.175% to 7.225%.

Date	Price (%)	Open (%)	High (%)	Low (%)
Mar 25, 2024	7.087	7.062	7.096	7.055
Mar 26, 2024	7.089	7.091	7.100	7.079
Mar 27, 2024	7.072	7.097	7.097	7.067
Mar 28, 2024	7.052	7.031	7.055	7.031
Mar 29, 2024	7.052	7.031	7.055	7.031
Apr 01, 2024	7.052	7.031	7.055	7.031
Apr 02, 2024	7.108	7.085	7.116	7.075
Apr 03, 2024	7.104	7.118	7.118	7.100
Apr 04, 2024	7.094	7.119	7.119	7.090
Apr 05, 2024	7.117	7.088	7.121	7.088
Apr 08, 2024	7.154	7.141	7.162	7.135
Apr 09, 2024	7.154	7.141	7.162	7.135
Apr 10, 2024	7.116	7.133	7.133	7.113
Apr 11, 2024	7.116	7.133	7.133	7.113
Apr 12, 2024	7.179	7.178	7.187	7.169
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

Data Source: RBI

During the week, the bond yield opened at 7.175% and closed at 7.225%. In the last six weeks, the benchmark Indian bond  yields have spiked from 7.014% to 7.225%. The India bond yields are roughly reflecting the spike in the US bond yield and the possibility that a stronger dollar, combined with the geopolitical risk in the Middle East, could lead to a spike in imported inflation into India. This week, the MPC minutes ruled out rate cuts for now. However, the restrained borrowing program of the central government and the persistent bond buying ahead of index inclusion will keep the India bond yields at elevated levels.

RUPEE CLOSES AT 83.36/$ AFTER CRUDE OIL PRICES FELL

With the dollar index above 106, it was obvious that the Indian Rupee came under pressure. Despite FPI selling of $2.23 Billion this week, the Friday fall in crude oil prices and the robust forex reserves of the government are becoming a shield.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Mar 25, 2024	83.405	83.465	83.548	83.384
Mar 26, 2024	83.309	83.415	83.441	83.254
Mar 27, 2024	83.294	83.365	83.480	83.291
Mar 28, 2024	83.352	83.373	83.424	83.310
Mar 29, 2024	83.324	83.393	83.408	83.220
Apr 01, 2024	83.360	83.343	83.408	83.310
Apr 02, 2024	83.322	83.374	83.448	83.330
Apr 03, 2024	83.504	83.375	83.585	83.330
Apr 04, 2024	83.340	83.478	83.513	83.350
Apr 05, 2024	83.293	83.417	83.471	83.241
Apr 08, 2024	83.270	83.344	83.352	83.225
Apr 09, 2024	83.182	83.271	83.291	83.166
Apr 10, 2024	83.389	83.227	83.426	83.147
Apr 11, 2024	83.324	83.413	83.438	83.295
Apr 12, 2024	83.540	83.368	83.622	83.316
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

Data Source: RBI

In the last 5 weeks, the rupee weakened from ₹82.900/$ to ₹83.358/$, which reflects sharp weakening in a month. INR has been above 83/$ for 5 weeks in a row. India rupee could pressure from any dollar index spike. Pressure on the Indian rupee in the non-deliverable forward (NDF) market also cannot be ruled out.

BRENT CRUDE FALLS SHARPLY ON FRIDAY

The latest week saw crude prices correct sharply in the last 2 days to around $87/bbl on hopes that the OPEC would boost supplies at higher price levels.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Mar 25, 2024	86.75	85.50	87.17	85.40
Mar 26, 2024	86.25	86.81	87.06	85.80
Mar 27, 2024	86.09	85.86	86.39	85.17
Mar 28, 2024	87.00	85.69	87.07	85.50
Mar 29, 2024	87.00	85.69	87.07	85.50
Apr 01, 2024	87.42	86.98	87.98	86.40
Apr 02, 2024	88.92	87.62	89.32	87.62
Apr 03, 2024	89.35	89.22	89.99	88.67
Apr 04, 2024	90.65	89.48	91.30	88.72
Apr 05, 2024	91.17	91.21	91.91	90.57
Apr 08, 2024	90.38	90.09	91.10	88.78
Apr 09, 2024	89.42	90.63	90.94	89.25
Apr 10, 2024	90.48	89.55	90.71	88.83
Apr 11, 2024	89.74	90.52	90.92	89.38
Apr 12, 2024	90.21	90.14	92.18	90.05
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

Data Source: Bloomberg

After hovering around $90/bbl, Brent closed the week at $87.21/bbl on ceasefire hopes in the Gulf region and hopes that OPEC would boost output to capitalize on higher prices. There has been some unwinding of long crude oil futures as supplies from non-OPEC countries like the US and Canada continue to remain robust. There are expectations that delayed rate cuts by the Fed may pull down the crude oil prices on demand concerns.

SPOT GOLD CLOSES AT $2,391/OZ AS RALLY CONTINUES

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)
Mar 25, 2024	2,171.45	2,165.79	2,181.30	2,163.50
Mar 26, 2024	2,178.58	2,171.82	2,200.15	2,167.75
Mar 27, 2024	2,194.02	2,179.03	2,197.71	2,173.59
Mar 28, 2024	2,232.38	2,194.19	2,235.90	2,187.33
Mar 29, 2024	2,232.38	2,194.19	2,235.90	2,187.33
Apr 01, 2024	2,250.36	2,239.59	2,265.86	2,228.54
Apr 02, 2024	2,280.10	2,250.88	2,281.17	2,246.79
Apr 03, 2024	2,299.17	2,279.57	2,301.22	2,265.50
Apr 04, 2024	2,289.43	2,299.62	2,305.31	2,280.15
Apr 05, 2024	2,329.50	2,289.88	2,330.34	2,267.85
Apr 08, 2024	2,338.89	2,322.00	2,354.09	2,302.86
Apr 09, 2024	2,352.58	2,339.24	2,365.34	2,336.94
Apr 10, 2024	2,332.79	2,352.91	2,360.15	2,319.54
Apr 11, 2024	2,373.24	2,333.17	2,377.80	2,325.84
Apr 12, 2024	2,343.43	2,373.59	2,431.53	2,333.90
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

Data Source: Bloomberg

The price of gold has gained 16.2% since the start of 2024 and even briefly scaled $2,418/oz during the week. Gold demand has been boosted by central bank demand and the geopolitical uncertainty. Investment portfolios are seeing merit in a gold hedge. Ironically, Fed may delay rate cuts, which should be negative for gold; as it increases the opportunity cost of holding gold. However, robust central bank demand may be the story.