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

21 Jul 2024 , 10:53 AM

HIGHER CAD COULD WEAKEN RUPEE IN FY25

The big story in the last few weeks has been the persistent weakening of the rupee. The rupee closed the latest week at 83.73/$ and even touched a lifetime low in this week. In addition, the dollar strengthening against the Euro and the Yen has also weakened the rupee. Even as oil prices stay above $80/bbl, a new concern is that the current account deficit (CAD) for FY25 may be higher than the FY24 levels. In FY24, the government of India reported a current account surplus in the fourth quarter, as a result of which the full year CAD was just about 0.7% of GDP. However, FY25 could be a tougher proposition and for that we need to understand the trade data for the first quarter.

Macro Trade Variables (FY Cumulative)	FY25 ($ bn) (Apr-Jun)	FY25 ($ bn) (Apr-May)	FY24 ($ bn) (Apr-Jun)	Change (%) YOY
Merchandise Exports	109.96	73.12	103.89	5.84%
Merchandise Imports	172.23	116.01	160.05	7.61%
Total Merchandise Trade	282.19	189.13	263.94	6.91%
Merchandise Trade Deficit	-62.27	-42.89	-56.16	10.88%
Services Exports	90.37	60.49	80.57	12.16%
Services Imports	50.67	33.91	45.45	11.49%
Total Services Trade	141.04	94.40	126.02	11.92%
Services Trade Surplus	39.70	26.58	35.12	13.04%
Combined Exports	200.33	133.61	184.46	8.60%
Combined  Imports	222.90	149.92	205.50	8.47%
Overall Trade Volume	423.23	283.53	389.96	8.53%
Overall Trade Deficit	-22.57	-16.31	-21.04	7.27%

Data Source: DGFT and RBI

The above data pertains to the first quarter of FY25 and comprises of the overall trade deficit for the first quarter. The overall deficit (merchandise deficit plus services surplus) is the most important component of the current account deficit. Here are key points.

• For FY24, the overall trade deficit stood at $79.3 Billion. However, the net impact of the primary outflows and secondary inflows were positive to the tune of $56.1 Billion; resulting in a net CAD of $23.2 Billion. That is around 0.7% of the GDP. How will it look in the current year.
• As of the close of Q1, the overall deficit stands at $22.5 Billion, which extrapolate into about $90 Billion. However, that would be partially neutralized by the net impact of the primary outflows and secondary inflows. That impact is likely to come down from $56.1 Billion to the normal range of $45-50 Billion. Hence we could see the CAD for the year at closer to $45 Billion, which would be closer to 1.4% of GDP. That is a key factor that is putting pressure on the Indian rupee in the recent few weeks.

But the actual situation may not be all that bad. Last year, the Indian economy reported much higher CAD in the initial quarters, but it tapered in subsequent quarters. It is very likely that India may be able to push the CAD closer to 1% of GDP in FY25, which should be good enough. But, for now, the rupee remains under pressure.

US BOND YIELDS  INCH UP; AS DOES THE DOLLAR INDEX

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 (%)
Jul 15, 2024	4.231	4.243	4.249	4.198
Jul 16, 2024	4.160	4.222	4.222	4.156
Jul 17, 2024	4.160	4.161	4.196	4.144
Jul 18, 2024	4.202	4.161	4.206	4.156
Jul 19, 2024	4.243	4.192	4.250	4.185

Data Source: Bloomberg

US bond yields started the week at slightly subdued levels of 4.231%, but gradually edged higher to close at 4.243% levels towards the end of the week. Bond yields had jumped up about 3 weeks back on expectations of a strong possibility of Trump 2.0 in November, when the US went to the hustings. That spike in bond yields is over and the last two weeks saw bond yields tapering. Data has been favouring lower bond yields. While the 30 bps fall in consumer inflation pulled down the yields, the willingness of the Fed to cut rates in September is still a matter of debate. During the week, the US bond yields touched a weekly high of 4.250% and a low of 4.144%. For now, the CME Fedwatch is betting heavily on two rate cuts in 2024 and 4-5 more rate cuts in 2025; but you can never be too sure. Let us now turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 15, 2024	104.19	104.08	104.32	104.03
Jul 16, 2024	104.27	104.25	104.51	104.20
Jul 17, 2024	103.75	104.22	104.29	103.65
Jul 18, 2024	104.17	103.70	104.23	103.65
Jul 19, 2024	104.36	104.15	104.42	104.15

Data Source: Bloomberg

In a week when the bond yields edged up on larger than expected drawdowns in oil inventories, the dollar index was not far behind. In June, we had seen dollar strength amidst weakness in the Euro and the Yen. That is over for now. For the week, the dollar index started on a steady note, opening at the 104.19 levels, and steadily inching higher to close the week at 104.36 levels. During the week, the dollar index (DXY) scaled a high of 104.51 and a low of 103.65.

INDIA BOND YIELDS END THE WEEK SLIGHTLY LOWER

The India 10-year bond yields have been below the 7% mark for 2 weeks in a row. In the latest week to July 19, 2024, the 10-year benchmark yields stayed well below the 7% mark, despite expectations of higher food inflation to continue in the next few months. The India CPI inflation for June was higher at 5.08%, but that was factored into the yields. For now, 7.00% looks like the upper resistance for bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 24, 2024	6.971	6.979	6.979	6.954
Jun 25, 2024	6.983	6.972	6.989	6.969
Jun 26, 2024	6.997	6.998	7.001	6.984
Jun 27, 2024	7.000	7.006	7.009	6.987
Jun 28, 2024	7.008	6.998	7.020	6.992
Jul 01, 2024	7.013	7.023	7.024	7.010
Jul 02, 2024	7.009	7.009	7.009	7.009
Jul 03, 2024	7.001	7.009	7.009	6.999
Jul 04, 2024	6.998	6.992	7.001	6.989
Jul 05, 2024	6.993	7.016	7.016	6.987
Jul 08, 2024	6.989	6.989	6.991	6.983
Jul 09, 2024	6.989	7.006	7.006	6.983
Jul 10, 2024	6.976	6.995	6.995	6.975
Jul 11, 2024	6.982	6.982	6.982	6.982
Jul 12, 2024	6.986	6.975	6.988	6.972
Jul 15, 2024	6.981	7.005	7.005	6.977
Jul 16, 2024	6.966	6.977	6.977	6.963
Jul 17, 2024	6.966	6.977	6.977	6.963
Jul 18, 2024	6.966	6.970	6.970	6.959
Jul 19, 2024	6.965	6.976	6.976	6.962

Data Source: RBI

During the week, the bond yield opened at 6.981% and closed at 6.965%. The June CPI inflation in India came in higher at 5.08% last week, and the residual impact was seen in this week. However, the higher than expected WPI inflation has indicated that the RBI may cut rates soon to ensure that the higher costs don’t start hitting corporate profit growth. During the week, India 10-year bond yields touched a high of 7.005% and a low of 6.959%. With the fiscal deficit and the current account deficit hinting at subdued yields, a lot will depend on whether normal monsoons could really tame food inflation.

RUPEE PRESSURED BY CAD WORRIES

With the dollar index almost flat at 104.36 levels; the rupee was expected to strengthen, but it weakened to close around the 83.724/$ mark.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jun 24, 2024	83.450	83.563	83.590	83.410
Jun 25, 2024	83.403	83.439	83.510	83.394
Jun 26, 2024	83.560	83.452	83.632	83.413
Jun 27, 2024	83.438	83.579	83.596	83.408
Jun 28, 2024	83.355	83.458	83.492	83.329
Jul 01, 2024	83.438	83.380	83.479	83.349
Jul 02, 2024	83.500	83.440	83.567	83.422
Jul 03, 2024	83.520	83.497	83.564	83.435
Jul 04, 2024	83.475	83.495	83.561	83.463
Jul 05, 2024	83.500	83.503	83.532	83.458
Jul 08, 2024	83.500	83.495	83.522	83.434
Jul 09, 2024	83.465	83.479	83.522	83.452
Jul 10, 2024	83.510	83.492	83.545	83.465
Jul 11, 2024	83.507	83.518	83.607	83.472
Jul 12, 2024	83.513	83.507	83.564	83.476
Jul 15, 2024	83.551	83.507	83.628	83.493
Jul 16, 2024	83.524	83.590	83.626	83.530
Jul 17, 2024	83.580	83.532	83.592	83.494
Jul 18, 2024	83.580	83.576	83.682	83.555
Jul 19, 2024	83.724	83.668	83.741	83.596

Data Source: RBI

Just about 4 weeks back, we had seen the rupee weaken to 83.684/$. That remained a closing low for the rupee; till that level was officially breached this week. In the recent week, the rupee made several attempts to get close to that mark; and finally succeeded in breaking above that level on the last trading day of the week. With controlled current account deficit (CAD) in FY24 and FPIs infusing $8.65 Billion in last 5 weeks, the expectation would have been for the rupee to stabilize. However, two factors are working against the rupee. Firstly, the US dollar continues to harden against the European currencies and that is putting pressure on the rupee. Secondly, even though oil prices tapered, there are now concerns that the current account deficit (CAD) for FY25 could be closer to 1% of GDP. For the week, the USDINR touched a high of 83.493/$ and a low of 83.741/$.

BRENT CRUDE FALLS BELOW $83/BBL ON CHINA WORRIES

After hovering around $85/bbl in the first four days of the week, oil but witnessed a sharp fall in the last day of trading on Friday, July 19, 2024. What worked against oil was the sharper than expected slowdown in Chinese demand, which has hit crude prices and the prices of core metals.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jun 24, 2024	86.01	84.99	86.16	84.71
Jun 25, 2024	85.01	86.06	86.23	84.74
Jun 26, 2024	85.25	84.89	85.81	84.47
Jun 27, 2024	86.39	85.01	86.50	84.88
Jun 28, 2024	86.41	86.56	87.22	86.24
Jul 01, 2024	86.60	84.90	86.88	84.85
Jul 02, 2024	86.24	86.71	87.46	86.16
Jul 03, 2024	87.34	86.44	87.39	85.89
Jul 04, 2024	87.43	87.09	87.59	86.51
Jul 05, 2024	86.54	87.45	87.95	86.49
Jul 08, 2024	85.75	86.74	86.92	85.56
Jul 09, 2024	84.66	85.67	85.85	84.53
Jul 10, 2024	85.08	84.92	85.66	84.00
Jul 11, 2024	85.40	85.45	85.89	84.64
Jul 12, 2024	85.03	85.69	86.35	84.95
Jul 15, 2024	84.85	85.10	85.37	84.42
Jul 16, 2024	83.73	84.78	84.86	83.30
Jul 17, 2024	85.08	83.66	85.20	83.43
Jul 18, 2024	85.11	85.23	85.81	84.22
Jul 19, 2024	82.63	84.72	85.35	82.56

Data Source: Bloomberg

Oil prices held above the $85/bbl mark in the week before falling below $83/bbl on Friday. The concerns are centred around a strong dollar and weakness in Chinese demand for oil on the back of lower than expected growth rate. The China factor subdued the robust oil demand argument as China appeared to be struggling to grow. For now, the demand supply gap is likely to continue, although Chinese demand could be the joker in the pack. For the week, Brent crude touched a high of $85.81/bbl and a low of $82.56/bbl.

SPOT GOLD TAPERS TO WEEKLY CLOSE OF $2,401/OZ

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)
Jun 24, 2024	2,332.93	2,321.60	2,335.02	2,317.37
Jun 25, 2024	2,319.01	2,333.25	2,337.26	2,315.56
Jun 26, 2024	2,297.91	2,320.00	2,323.95	2,293.70
Jun 27, 2024	2,327.45	2,299.80	2,331.00	2,296.50
Jun 28, 2024	2,325.71	2,327.75	2,339.79	2,319.15
Jul 01, 2024	2,331.70	2,326.46	2,338.72	2,318.55
Jul 02, 2024	2,329.28	2,332.05	2,336.90	2,319.24
Jul 03, 2024	2,356.06	2,328.00	2,365.06	2,326.93
Jul 04, 2024	2,356.12	2,353.70	2,362.64	2,350.76
Jul 05, 2024	2,391.46	2,358.01	2,393.04	2,354.03
Jul 08, 2024	2,358.80	2,391.77	2,391.85	2,351.16
Jul 09, 2024	2,363.58	2,358.60	2,371.52	2,349.59
Jul 10, 2024	2,371.07	2,363.80	2,386.75	2,362.73
Jul 11, 2024	2,414.78	2,371.58	2,424.62	2,370.83
Jul 12, 2024	2,411.27	2,416.47	2,418.37	2,391.52
Jul 15, 2024	2,422.07	2,409.50	2,439.74	2,401.35
Jul 16, 2024	2,468.57	2,424.80	2,469.91	2,423.54
Jul 17, 2024	2,458.38	2,476.22	2,483.78	2,451.60
Jul 18, 2024	2,444.97	2,460.13	2,475.02	2,440.41
Jul 19, 2024	2,400.79	2,445.34	2,446.29	2,393.92

Data Source: Bloomberg

Gold closed the week lower at $2,400.79/oz in the spot gold market. In the last few days, price of gold had spiked decisively above $2,400/oz The rally in gold prices in the last couple of weeks came on the back of dollar weakness and central bank buying. Gold closed the week lower at $2,401/oz, falling sharply in the last 4 days of the week. Gold traders are betting on Fed rates cuts in 2025, which reduces the opportunity cost of holding gold. During the week, gold touched a high of $2,484/oz and a low of $2,401/oz.