FED SAYS RATE CUTS WILL HAPPEN; BUT GRADUALLY
With the USDINR at all-time lows, it is apparent that the weakness in the rupee is being driven by dollar strength. JP Morgan, in a recent report has identified 4 key reasons why the dollar has been strengthening.
The strength of the dollar not only comes from the Fed policy, but also the monetary policy divergence in the EU, UK, and Japan; which is driving flows towards dollar assets.
WHY LONG ON DOLLAR IS STILL THE BIG TRADE?
The strength in the US economy has got transmitted to the dollar. Above average levels of inflation in the US and strong labour market data, have given strength to the dollar. At the same time, the monetary divergence risks for other central banks is making the dollar stronger. For now, the bet is that the Fed will treat cautiously on rate cuts this year.
One interesting shift on the interest rate cut debate in the last few weeks is that it has gradually shifted from “when’ to ‘whether” the Fed will cut rates in this calendar year. Even the Fed promise of a September 2024 rate cut is contingent on inflation showing a decisive move towards the 2% mark. The US dollar automatically tends to appreciate in times of global uncertainty and that is another factor that is favouring the long-dollar trade.
The inflation risks to oil come from the recent decision by Russia to further cut oil output. This contrary to the view that there could be a supply glut this year. If Russia cuts supplies of oil, then crude could touch $100/bbl and that would mean higher crude prices, higher energy inflation and diminishing prospects of rate cut in September 2024. That is likely to be positive for the long-dollar trade. An interesting trend since the year 2022 has been that the dollar and oil have moved in tandem. There is a logic to it. So, if oil moves to $100/bbl, then energy inflation puts pressure on the headline inflation and the US economy moves farther away from the 2% target. That could induce the Fed to go slow on rate cuts. Let us now move to the key macro variables for the week.
US BOND YIELDS STABLE, BUT DOLLAR INDEX HARDENS
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 (%) |
Jun 17, 2024 | 4.285 | 4.244 | 4.294 | 4.231 |
Jun 18, 2024 | 4.219 | 4.275 | 4.300 | 4.207 |
Jun 19, 2024 | 4.236 | 4.225 | 4.241 | 4.223 |
Jun 20, 2024 | 4.261 | 4.234 | 4.294 | 4.228 |
Jun 21, 2024 | 4.257 | 4.263 | 4.281 | 4.217 |
Data Source: Bloomberg
US bond yields started the week at subdued levels of 4.285%, but gradually edged lower to touch 4.257% levels towards the end of the week. The US bond yields were led lower first by the increasing likelihood of the Fed cutting raters in September. While the Fed reduced its rate cut estimates to just one cut in 2024, bond yields tapered as the rate cuts are expected to be more aggressive in 2025. Bond yields are trended lower in the last 2 weeks. The markets are veering around to the belief that rates will still be cut, and perhaps a lot more aggressive in 2025. Let us turn to the US dollar index (DXY), a barometer of dollar strength.
Date | Price (%) | Open (%) | High (%) | Low (%) |
Jun 17, 2024 | 105.32 | 105.51 | 105.65 | 105.31 |
Jun 18, 2024 | 105.26 | 105.30 | 105.56 | 105.13 |
Jun 19, 2024 | 105.25 | 105.26 | 105.34 | 105.15 |
Jun 20, 2024 | 105.59 | 105.20 | 105.67 | 105.20 |
Jun 21, 2024 | 105.80 | 105.64 | 105.92 | 105.54 |
Data Source: Bloomberg
In a week when the bond yields fell, the dollar index strengthened and got closer to the 106 mark. There was a reason for that and it can be largely attributed to the weakness in the Euro, as well as weakness in the other hard currencies like the Pound Sterling and the Yen. The political turmoil in France led to a sharp fall in the Euro; which is 57% of the trade weighted dollar index so the impact was immediate and sharp. That explains why there is a dichotomy between the bond yields movement and the dollar index move during the week. For the week, the dollar index started on a steady note, opening at the 105.32 levels, and stayed in a range. However, on Friday, the dollar index spiked to 105.80 at close as the dollar continued to harden. During the week, the dollar index scaled a high of 105.92 and a low of 105.13.
INDIA BOND YIELDS STAY BELOW THE 7% MARK
After falling below 7% mark in the previous, the benchmark 10-year bond yields stayed persistently below the 7% mark during the week; closing the week at 6.973%. While the return of political certainty is one factor, the bond yields also fell due to the signals coming from the US Fed of aggressive rate cuts in 2025.
Date | Price (%) | Open (%) | High (%) | Low (%) |
May 27, 2024 | 6.981 | 7.016 | 7.016 | 6.967 |
May 28, 2024 | 6.995 | 6.981 | 6.998 | 6.971 |
May 29, 2024 | 7.008 | 7.020 | 7.020 | 6.987 |
May 30, 2024 | 7.003 | 7.022 | 7.022 | 6.995 |
May 31, 2024 | 6.986 | 6.991 | 6.994 | 6.980 |
Jun 03, 2024 | 6.947 | 6.955 | 6.963 | 6.945 |
Jun 04, 2024 | 7.033 | 6.955 | 7.062 | 6.951 |
Jun 05, 2024 | 7.026 | 7.034 | 7.054 | 7.023 |
Jun 06, 2024 | 7.015 | 7.020 | 7.023 | 7.013 |
Jun 07, 2024 | 7.018 | 7.020 | 7.036 | 7.005 |
Jun 10, 2024 | 7.032 | 7.048 | 7.048 | 7.027 |
Jun 11, 2024 | 7.014 | 7.055 | 7.055 | 7.012 |
Jun 12, 2024 | 7.012 | 7.012 | 7.015 | 7.007 |
Jun 13, 2024 | 6.986 | 7.003 | 7.003 | 6.985 |
Jun 14, 2024 | 6.984 | 6.980 | 6.991 | 6.975 |
Jun 17, 2024 | 6.984 | 6.980 | 6.991 | 6.975 |
Jun 18, 2024 | 6.981 | 6.998 | 6.998 | 6.981 |
Jun 19, 2024 | 6.974 | 6.981 | 6.981 | 6.964 |
Jun 20, 2024 | 6.976 | 6.984 | 6.984 | 6.970 |
Jun 21, 2024 | 6.973 | 6.984 | 6.984 | 6.972 |
Data Source: RBI
During the week, the bond yield opened at 6.984% and closed at 6.973%. After the initial jitters, the bond markets are now reconciling to the fact that it will be business as usual for fiscal prudence. During the week, India 10-year bond yields touched a high of 6.998% and a low of 6.970%. With fiscal deficit likely to be on track for 5.1% of GDP in FY25, there is no pressing reason for the rates to go above 7%.
RUPEE TOUCHES LIFE TIME LOW ON DOLLAR STRENGTH
With the dollar index spiking to 105.55 levels; the rupee weakened to 83.55/$, despite positive inflows from FPIs during the week.
Date | Price (₹/$) | Open (₹/$) | High (₹/$) | Low (₹/$) |
May 27, 2024 | 83.102 | 83.070 | 83.147 | 83.034 |
May 28, 2024 | 83.160 | 83.137 | 83.209 | 83.103 |
May 29, 2024 | 83.340 | 83.197 | 83.411 | 83.172 |
May 30, 2024 | 83.280 | 83.363 | 83.442 | 83.246 |
May 31, 2024 | 83.424 | 83.321 | 83.501 | 83.235 |
Jun 03, 2024 | 83.083 | 83.124 | 83.188 | 82.952 |
Jun 04, 2024 | 83.524 | 83.120 | 83.676 | 83.085 |
Jun 05, 2024 | 83.370 | 83.539 | 83.585 | 83.277 |
Jun 06, 2024 | 83.466 | 83.390 | 83.527 | 83.357 |
Jun 07, 2024 | 83.521 | 83.472 | 83.529 | 83.365 |
Jun 10, 2024 | 83.500 | 83.530 | 83.551 | 83.468 |
Jun 11, 2024 | 83.600 | 83.521 | 83.639 | 83.480 |
Jun 12, 2024 | 83.430 | 83.618 | 83.622 | 83.433 |
Jun 13, 2024 | 83.540 | 83.507 | 83.575 | 83.487 |
Jun 14, 2024 | 83.547 | 83.546 | 83.593 | 83.514 |
Jun 17, 2024 | 83.500 | 83.523 | 83.567 | 83.503 |
Jun 18, 2024 | 83.330 | 83.498 | 83.560 | 83.322 |
Jun 19, 2024 | 83.460 | 83.394 | 83.491 | 83.340 |
Jun 20, 2024 | 83.620 | 83.422 | 83.684 | 83.417 |
Jun 21, 2024 | 83.568 | 83.630 | 83.631 | 83.498 |
Data Source: RBI
Two weeks back, the rupee weakness was driven by political uncertainty, but in the recent two weeks, it was all about strength in the dollar amidst the sharp fall in the Euro. Apart from the dollar strength, the spike in crude prices were also a factor in rupee weakness. Things could have been worse, had it not been for the $3.24 Billion of FPI flows in the last two weeks into equities. For the week, rupee touched a high of 83.322/$ and a low of 83.684/$; with the pressure weakening the Indian rupee versus the dollar.
BRENT CRUDE INCHES CLOSER TO $85/BBL
After hovering below $80/bbl for most part of the first week of June, the last 2 weeks saw the oil prices again bouncing back closer to $85/bbl. The spike in oil prices came after the US API reserves saw a drawdown of more than 2.47 Million barrels during the week. Also, Russia announced that it may cut supplies, raising the spectre of $100/bbl Brent Crude.
Date | Price ($/bbl) | Open ($/bbl) | High ($/bbl) | Low ($/bbl) |
May 27, 2024 | 83.10 | 82.20 | 83.20 | 82.08 |
May 28, 2024 | 84.22 | 83.00 | 84.62 | 83.00 |
May 29, 2024 | 83.60 | 84.61 | 85.02 | 83.29 |
May 30, 2024 | 81.86 | 83.51 | 83.77 | 81.80 |
May 31, 2024 | 81.62 | 81.74 | 82.18 | 81.17 |
Jun 03, 2024 | 78.36 | 81.15 | 81.65 | 78.09 |
Jun 04, 2024 | 77.52 | 78.14 | 78.22 | 76.76 |
Jun 05, 2024 | 78.41 | 77.29 | 78.66 | 77.18 |
Jun 06, 2024 | 79.87 | 78.70 | 80.08 | 78.38 |
Jun 07, 2024 | 79.62 | 80.05 | 80.38 | 79.32 |
Jun 10, 2024 | 81.63 | 79.38 | 82.17 | 79.34 |
Jun 11, 2024 | 81.92 | 81.97 | 82.36 | 81.19 |
Jun 12, 2024 | 82.60 | 82.08 | 83.34 | 81.96 |
Jun 13, 2024 | 82.75 | 82.42 | 83.05 | 81.80 |
Jun 14, 2024 | 82.62 | 82.05 | 83.39 | 81.92 |
Jun 17, 2024 | 83.52 | 82.07 | 83.79 | 81.54 |
Jun 18, 2024 | 84.53 | 83.62 | 84.70 | 82.97 |
Jun 19, 2024 | 84.29 | 84.61 | 84.98 | 84.17 |
Jun 20, 2024 | 84.86 | 84.40 | 85.14 | 84.19 |
Jun 21, 2024 | 84.33 | 84.78 | 85.30 | 83.95 |
Data Source: Bloomberg
Oil prices spiked 2.1% in the week after a 3.8% rally last week. US drawdowns were larger than expected and that gave a boost to oil prices. But the real concerns are on the Russia supply cut front. For the week, Brent crude touched a high of $85.30/bbl and a low of $81.54/bbl.
SPOT GOLD EASES LOWER TO $2,321/OZ
The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams.
Date | Price ($/oz) | Open ($/oz) | High ($/oz) | Low ($/oz) |
May 27, 2024 | 2,350.74 | 2,334.50 | 2,358.56 | 2,332.36 |
May 28, 2024 | 2,360.95 | 2,352.29 | 2,364.12 | 2,340.17 |
May 29, 2024 | 2,338.77 | 2,361.00 | 2,362.86 | 2,334.75 |
May 30, 2024 | 2,343.00 | 2,339.67 | 2,351.83 | 2,322.72 |
May 31, 2024 | 2,326.97 | 2,345.07 | 2,353.24 | 2,323.96 |
Jun 03, 2024 | 2,350.35 | 2,329.61 | 2,354.82 | 2,314.76 |
Jun 04, 2024 | 2,327.68 | 2,349.00 | 2,351.76 | 2,315.53 |
Jun 05, 2024 | 2,354.78 | 2,328.00 | 2,358.07 | 2,325.88 |
Jun 06, 2024 | 2,375.61 | 2,355.16 | 2,378.57 | 2,353.60 |
Jun 07, 2024 | 2,292.71 | 2,376.50 | 2,387.85 | 2,286.77 |
Jun 10, 2024 | 2,310.53 | 2,296.00 | 2,313.87 | 2,287.31 |
Jun 11, 2024 | 2,316.27 | 2,311.00 | 2,320.17 | 2,297.69 |
Jun 12, 2024 | 2,322.52 | 2,315.53 | 2,341.70 | 2,310.80 |
Jun 13, 2024 | 2,303.54 | 2,325.70 | 2,326.70 | 2,295.68 |
Jun 14, 2024 | 2,332.52 | 2,302.52 | 2,336.87 | 2,301.35 |
Jun 17, 2024 | 2,318.87 | 2,332.20 | 2,333.48 | 2,310.02 |
Jun 18, 2024 | 2,328.33 | 2,319.38 | 2,333.25 | 2,306.63 |
Jun 19, 2024 | 2,327.48 | 2,329.79 | 2,335.10 | 2,323.84 |
Jun 20, 2024 | 2,359.63 | 2,329.15 | 2,365.52 | 2,327.30 |
Jun 21, 2024 | 2,321.51 | 2,360.91 | 2,368.77 | 2,316.82 |
Data Source: Bloomberg
After rallying to above $2,420/oz, gold had fallen two weeks back to $2,292/oz. Gold hardened this week on hopes that rate cuts would be aggressive in 2025; but the lure of gold is not too high now, with the high prices. Rate cuts will cut the opportunity cost of holding gold; but that is yet to start. During the week, gold touched a high of $2,369/oz and a low of $2,306/oz.
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