Weekly Musings – Macro Quartet for the week ending March 22, 2024

26 Mar 2024 , 07:28 AM

STRONG DOLLAR SPOOKS INDIAN RUPEE

The big news in the week was the sharp strength in the dollar, which led to the Indian rupee weakening to its lowest even level of ₹83.55/$. The dollar index was reflected in the dollar index showing a sharp spike to well above the 104.50 levels during the week. The trigger for the sharp rally in the dollar was the weakness in the major global currencies like the UK Pound and the Euro. Both these currencies weakened after the Bank of England and the ECB gave indications that rate hikes may be done and it was time for rate cuts.

That is never positive for the currency and the weakness in the Euro and the Pound led to a sharp bounce in the US dollar. For the Indian rupee, apart from the dollar index, it was also the FPI selling in the week that weakened the rupee. Also, the recent data indicated that the outward remittances continued to be robust despite the higher 20% withholding tax imposed on the funds sent out of India under the Liberalized Remittance Scheme (LRS).

FED STATEMENT SENT OUT CRITICAL SIGNALS

Th week also saw the Fed policy for March being announced by the US Fed. In the post-policy statement and the interview given by Jerome Powell  to the press; two things came out. Firstly, it was evident that inflation would remain elevated for a longer period of time. Secondly, the Fed also gave some sort of tacit assurance that it would undertake 3 rate cuts in the year 2024, even if back-ended. However, the signal was also that the number of rate cuts in 2025 may be reduced from four to three and the glide path of rates could be slower.

There were also positives coming from the Fed quarterly update of key macros for the March quarter. According to the update, GDP in the US was likely to be higher than expected in 2024 and also in 2025. The long term update also indicated that the US economy may have now fully avoided a hard landing and growth was poised for robust growth in the coming quarters. However, it was also evident from the dot-plot that the inflation would taper slowly as the last mile would continue to be challenging, especially in the light of the Red Sea crisis. In fact, estimates are pegging higher core inflation in 2024.

US BOND YIELDS TAPER; DOLLAR INDEX SPIKES SHARPLY

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 (%)
Mar 18, 2024	4.328	4.308	4.348	4.291
Mar 19, 2024	4.293	4.328	4.336	4.287
Mar 20, 2024	4.277	4.285	4.324	4.233
Mar 21, 2024	4.269	4.273	4.293	4.218
Mar 22, 2024	4.216	4.266	4.269	4.198

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.328%, but tapered through the week to eventually close at 4.216%. Last week, the bond yields in the US had spiked after the core inflation on a MOM basis was sharply higher at 0.4%. Also, the consumer inflation in the previous week had shown a 10 bps uptick to 3.2%. The major driver of US bond yields in the current week was the Fed policy statement and the update to the long term projections.

The Fed policy held rates, as expected, but Jerome Powell also gave a tacit commitment to the markets that 3 rate cuts would be honoured in 2024. That has gone down well with markets leading to tapering of bonds yields in the week. However, high inflation and robust growth would also mean that the Fed would be in no hurry to cut rates and it would only done in a calibrated manner. Let us now turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Mar 18, 2024	103.43	103.45	103.65	103.33
Mar 19, 2024	103.59	103.59	104.06	103.58
Mar 20, 2024	103.24	103.87	104.15	103.24
Mar 21, 2024	104.00	103.24	104.05	103.17
Mar 22, 2024	104.45	104.00	104.46	103.92

Data Source: Bloomberg

The week belonged to the dollar index (DXY), which triggered most of the action in the global financial markets this week. For the week, the dollar index spiked from 103.43 to 104.45. The trigger for the spike in the dollar index came in the last two days after a sharp fall in global currencies like the Euro and the UK Pound. The central banks of EU and UK have indicated that rate hike cycle may be over and they may evaluate rate cuts soon. That led to a sharp fall in these currencies, which in turn strengthened the US dollar. That is reflected in the dollar index. The dollar index (DXY) measures dollar strength against a basket of hard currencies like Pound, Euro, Yen, Yuan etc. While the Indian rupee is not part of that basket, the dollar index still has a bearing on the rupee value, as was evident.

INDIA BOND YIELDS INCH UP TO 7.087%

During the week, the Indian benchmark 10-year bond yields went up from 7.062% to 7.087%. There were two triggers for the Indian bond yields. Firstly, there was the lag effect of the higher food inflation announced in the previous week. Also, the Red Sea crisis may be in the backburner, but higher freight costs and higher insurance premiums are an overhang.

Date	Price (%)	Open (%)	High (%)	Low (%)
Feb 26, 2024	7.063	7.055	7.066	7.046
Feb 27, 2024	7.068	7.074	7.074	7.061
Feb 28, 2024	7.065	7.076	7.076	7.060
Feb 29, 2024	7.078	7.059	7.082	7.057
Mar 01, 2024	7.060	7.062	7.082	7.057
Mar 04, 2024	7.060	7.051	7.062	7.047
Mar 05, 2024	7.057	7.066	7.066	7.053
Mar 06, 2024	7.054	7.053	7.057	7.048
Mar 07, 2024	7.031	7.054	7.054	7.026
Mar 08, 2024	7.031	7.054	7.054	7.026
Mar 11, 2024	7.014	7.025	7.025	7.006
Mar 12, 2024	7.026	7.025	7.029	7.015
Mar 13, 2024	7.039	7.043	7.043	7.030
Mar 14, 2024	7.041	7.046	7.048	7.038
Mar 15, 2024	7.062	7.060	7.064	7.051
Mar 18, 2024	7.087	7.080	7.088	7.075
Mar 19, 2024	7.095	7.096	7.100	7.081
Mar 20, 2024	7.097	7.101	7.103	7.089
Mar 21, 2024	7.050	7.080	7.080	7.048
Mar 22, 2024	7.087	7.062	7.096	7.055

Data Source: RBI

During the week, the bond yield opened at 7.087% and closed also at 7.087%; although it spike compared to the previous week close. In the last 2 weeks, the benchmark Indian bond  yields have spiked from 7.014% to 7.087%. it may be recollected that bond yields had fallen sharply post the Interim Budget, which had cut fiscal deficit targets for FY25 to 5.1%. However, with elections round the corner, the street expectation is that rate cuts, if any, would be back-ended to the second half of 2024. That is keeping yields in a tepid range.

RUPEE WEAKENS sharply TO 83.55/$ AT CLOSE

The rupee, during the week, was impacted by the strengthening of the US dollar. The dollar index went above 104.45, while the price of Brent Crude remained stable. However, the rupee weakness was largely led this week after the US hardened against most of the key currencies that constitute the dollar index (DXY) basket.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Feb 26, 2024	82.846	82.873	82.914	82.851
Feb 27, 2024	82.877	82.901	82.921	82.841
Feb 28, 2024	82.900	82.924	82.967	82.863
Feb 29, 2024	82.900	82.910	82.957	82.864
Mar 01, 2024	82.841	82.926	82.933	82.836
Mar 04, 2024	82.911	82.845	82.935	82.830
Mar 05, 2024	82.891	82.913	82.938	82.863
Mar 06, 2024	82.780	82.896	82.919	82.801
Mar 07, 2024	82.708	82.820	82.850	82.669
Mar 08, 2024	82.770	82.743	82.792	82.660
Mar 11, 2024	82.720	82.754	82.782	82.645
Mar 12, 2024	82.786	82.739	82.839	82.720
Mar 13, 2024	82.820	82.830	82.923	82.774
Mar 14, 2024	82.915	82.827	82.952	82.803
Mar 15, 2024	82.883	82.990	82.995	82.817
Mar 18, 2024	82.900	82.891	82.935	82.825
Mar 19, 2024	83.007	82.935	83.063	82.899
Mar 20, 2024	83.173	83.053	83.233	82.990
Mar 21, 2024	83.174	83.117	83.235	83.034
Mar 22, 2024	83.549	83.215	83.714	83.201

Data Source: RBI

The rupee weakened sharply during the week from ₹82.883/$ to ₹83.549/$, which reflects a sharp weakening in a single week. FPIs were net sellers in the week of $314 Million in equities, but that was more than offset by the inflows into debt. However, the dollar index spiked as the dollar strengthened against the pound and the Euro after the Bank of England and the ECB (European Central Bank) hinted at the end of the rate hike cycle and possible rate cuts in the near future. Another factor that kept the rupee under pressure was the uncertain future of the yen carry trade, especially after Japan pushed interest into positive territory for the first time in 17 years.

BRENT CRUDE CLOSES FLAT ON DOLLAR PRESSURE

The latest week saw crude prices spike on demand supply mismatch, but the dollar strength largely neutralized this impact by the end of the week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Feb 26, 2024	82.53	81.41	83.07	81.00
Feb 27, 2024	83.65	82.64	83.70	82.10
Feb 28, 2024	83.68	83.30	84.31	82.60
Feb 29, 2024	81.91	81.83	82.84	81.51
Mar 01, 2024	83.55	82.07	84.34	81.81
Mar 04, 2024	82.80	83.50	84.08	82.57
Mar 05, 2024	82.04	82.74	83.14	81.72
Mar 06, 2024	82.96	82.01	84.05	81.85
Mar 07, 2024	82.96	82.92	83.53	82.07
Mar 08, 2024	82.12	83.20	83.85	81.72
Mar 11, 2024	82.21	82.00	82.75	81.08
Mar 12, 2024	81.92	82.45	83.01	81.69
Mar 13, 2024	84.03	82.45	84.24	81.96
Mar 14, 2024	85.42	84.04	85.69	83.98
Mar 15, 2024	85.34	85.15	85.55	84.60
Mar 18, 2024	86.89	85.32	87.18	85.25
Mar 19, 2024	87.38	86.94	87.70	86.48
Mar 20, 2024	85.95	87.15	87.35	85.59
Mar 21, 2024	85.60	86.29	86.63	85.06
Mar 22, 2024	85.47	85.64	86.15	85.11

Data Source: Bloomberg

The Brent Crude prices, did touch a high of $87.15/bbl in the week, but closed the week at $85.47/bbl. At a fundamental level, the concerns over the demand supply mismatch, US inventory drawdowns and the Red Sea crisis led to a spike in oil in the early part of the week. However, dollar strength neutralized that impact, as oil is denominated in dollars.

SPOT GOLD PRICES TAPER TO $2,160/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. Here is gold price summary.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Feb 26, 2024	2,030.66	2,034.49	2,037.59	2,025.10
Feb 27, 2024	2,029.64	2,030.99	2,039.99	2,028.78
Feb 28, 2024	2,034.62	2,030.05	2,038.30	2,024.56
Feb 29, 2024	2,043.24	2,034.92	2,050.79	2,027.75
Mar 01, 2024	2,083.39	2,043.44	2,088.40	2,038.55
Mar 04, 2024	2,114.99	2,082.09	2,119.95	2,079.45
Mar 05, 2024	2,127.55	2,115.15	2,142.15	2,110.52
Mar 06, 2024	2,148.29	2,127.95	2,152.29	2,123.65
Mar 07, 2024	2,159.16	2,148.54	2,164.54	2,144.29
Mar 08, 2024	2,176.90	2,162.03	2,195.19	2,154.09
Mar 11, 2024	2,182.47	2,177.71	2,189.04	2,174.80
Mar 12, 2024	2,157.99	2,183.00	2,184.86	2,150.59
Mar 13, 2024	2,174.40	2,158.25	2,179.91	2,155.54
Mar 14, 2024	2,161.01	2,174.29	2,177.10	2,152.86
Mar 15, 2024	2,155.54	2,162.40	2,173.25	2,155.19
Mar 18, 2024	2,159.99	2,156.00	2,163.64	2,146.05
Mar 19, 2024	2,157.23	2,160.70	2,162.93	2,146.90
Mar 20, 2024	2,185.96	2,158.29	2,188.90	2,149.60
Mar 21, 2024	2,180.81	2,186.00	2,218.65	2,166.50
Mar 22, 2024	2,159.94	2,181.84	2,186.14	2,157.20

Data Source: Bloomberg

Over the last 4 weeks, the price of spot gold stayed above $2,000/oz. The uncertainty in the market, high equity valuations and the ongoing Red Sea crisis all gave a boost to gold prices in recent week. However, in the latest week to March 22, 2024, gold prices eased to $2,160/bbl. There were two reasons for the fall. Firstly, the spike in the dollar led to a fall in gold prices, since it is denominated globally in dollars. Secondly, after the Fed chair indicated that rate cuts would be slower than expected, gold price rally slowed as gold needs lower rates to reduce the opportunity cost of holding gold. The week was largely all about the dollar strength, impacting macros across asset classes.