Weekly Musings – Macro Quartet for the week ending March 29, 2024

31 Mar 2024 , 10:02 AM

WHY IS THE US DOLLAR HARDENING

The one thing that appears to be confounding the global markets is the sharp strength in the dollar. That is evident in the dollar index rising sharply in the previous week and moving up further in the current week. It is still well short of its recent high of 107 levels, but the spike in recent weeks has been sharp and that is also having an impact on the Indian rupee. Broadly, there are 3 reasons driving the dollar index higher.

• The currencies of the EU and UK have weakened in recent weeks and that has directly translated into dollar strength. UK has seen its economy contracting for 2 quarters in succession and that has led to calls for an end to rate hikes and shifting gears towards cutting rates. Already, rates in the UK and EU are at multi-year highs, so the expectation of rate cuts has pushed down these currencies and hardened the dollar.
• The current year is likely to be disruptive with oil prices rising and a series of big elections across the globe. That is likely to create a lot of money moving towards safe haven. While, gold is one safe haven that investors are looking, dollar assets are the other logical port of call. That is hardening the dollar.
• Above all, some interesting indications came from the US Q4 GDP final estimate and the PCE inflation for February. GDP was 20 bps higher than the second estimate while PCE inflation was 10 bps higher, led by energy inflation. This is a classic recipe for the Fed to delay rate cuts further and that has been a trigger for the dollar hardening.

The hardening of the rupee had had its impact on the Indian rupee, which stayed above $83/bbl for 2 weeks in a row.

IS THERE IRRATIONAL EXUBERANCE OVER GOLD?

Gold prices have been a roll for some time. In March alone, there were around 5 occasions when the price of gold touched a new lifetime high. The price of gold closed the month of March above $2,200/oz. The question is; why are gold prices rising when the dollar is hardening and when rate cuts are likely to be back-ended. Investors are wondering whether there is irrational exuberance over gold. Being a physical asset with limited supply, irrational exuberance over gold is hard to imagine. However, it looks like gold is one of the preferred asset classes for diversification at multiple levels. Not just individual and institutional investors, but even central banks are diversifying their mix through gold. That perhaps answers this rather enigmatic rally in gold.

US BOND YIELDS TAPER; DOLLAR INDEX EDGES HIGHER

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 25, 2024	4.249	4.198	4.261	4.190
Mar 26, 2024	4.238	4.243	4.273	4.222
Mar 27, 2024	4.188	4.238	4.241	4.182
Mar 28, 2024	4.206	4.206	4.238	4.183
Mar 29, 2024	4.210	4.210	4.210	4.210

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.249%, but tapered from higher levels to eventually close at 4.210%. It was a truncated with just 4 days of markets. The latest macro data shows PCE inflation higher than expected and the Fed probably delaying the start of rate cuts. The bond yields have not had an opportunity to react to this data, so we could see the impact in the coming week. Bond yields could remain at elevated levels, if rate cuts are likely to be back-ended by the Fed.

Last week, Jerome Powell had given a tacit commitment to the markets that 3 rate cuts would happen in 2024. That went down well with markets leading to tapering of bonds yields in the week. This week, the message appears to be contrary to that, especially after the GDP and PCE inflation data came out. Let us now turn to the US dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Mar 25, 2024	104.23	104.41	104.47	104.14
Mar 26, 2024	104.30	104.23	104.34	104.01
Mar 27, 2024	104.43	104.29	104.46	104.22
Mar 28, 2024	104.53	104.43	104.73	104.31
Mar 29, 2024	104.51	104.53	104.67	104.41

Data Source: Bloomberg

The rally in the current week in the dollar index (DXY) was nowhere close to what we saw in the previous week. However, the trend was still higher. One trigger is that as long as the European currencies remain under pressure, the dollar should be valuable in relative terms. For the week, the dollar index spiked from 104.23 to 104.51. The central banks of EU and UK have indicated that rate hike cycle may be over and they may consider rate cuts soon. That led to a sharp weakening of these currencies, which strengthened the US dollar. That is reflected in the dollar index; although the impact was more measured this week. The dollar index (DXY) measures dollar strength against a basket of hard currencies like Pound, Euro, Yen, Yuan etc. Indian rupee is not part of that basket.

INDIA BOND YIELDS TREND LOWER TO 7.052%

During the week, the Indian benchmark 10-year bond yields went down from 7.087% to 7.062%. This week, there was some aggressive bond buying in the G-Sec market, which led to the prices of bonds going up and the bond yields coming down. That is reflected in the table below.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
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

Data Source: RBI

During the week, the bond yield opened at 7.087% and closed at 7.052%. In the last 3 weeks, the benchmark Indian bond  yields have spiked from 7.014% to 7.087% and have since fallen back to 7.052%. 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 STAYS ABOVE RS83/$ FOR 2 WEEKS IN A ROW

The rupee, during the week, was impacted by the strengthening of the US dollar. The dollar index went above 104.50, while the price of Brent Crude inched up. For the week, the rupee remained in a range, but it continues to remain above the 83/$ mark for 2 weeks in a row.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
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

Data Source: RBI

The rupee had weakened sharply in the previous week from ₹82.883/$ to ₹83.549/$, which reflects a sharp weakening in a single week. In the current week, the rupee closed at ₹83.324/$. FPIs were net sellers in the week of $360 Million in equities; and they have net sold equities worth $674 Million in last 2 weeks. That was more than offset by the inflows into debt. The dollar stayed buoyant in the week and that kept the rupee under pressure. Another concern is the unwinding of the yen carry trade after Japan decided to finally shift to positive interest rates after 17 years. Rupee is also seeing pressure in the global NDF markets, which is largely based out of Dubai and Singapore.

BRENT CRUDE CLOSES HIGHER AT $87/BBL ON SUPPLY CONCERNS

The latest week saw crude prices spike on demand supply mismatch, which led to Brent Crude spiking to $87/bbl at the close of the week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
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

Data Source: Bloomberg

The Brent Crude prices, almost closed at the high point of the week at $87/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 during the week. There has been little progress on ceasefire talks between Israel and the Hamas and that is keeping oil elevated.

SPOT GOLD PRICES AT LIFETIME HIGH OF $2,232/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)
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
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

Data Source: Bloomberg

Over the last 4 weeks, the price of spot gold stayed above $2,100/oz. The uncertainty in the market, high equity valuations and Red Sea crisis combined to give a boost to gold prices. In the latest week to March 29, 2024, gold prices touched lifetime $2,232/oz. There is an irony here. Data is indicating that the Fed may delay rate cuts and that is normally negative for gold prices. Lower rates reduce the opportunity cost of holding gold and boost gold prices. However, the geopolitical uncertainty and currency volatility is making gold attractive. Investors diversifying into gold as a hedge is also helping gold demand and keeping prices elevated.