FX MARKETS

RBI rate cut rumors vanished at the start of the week with the continued depreciation of the rupee being the key story. Experts opined that a rate cut at the time of sharp depreciation across emerging currencies in Asia a rate cut would not work well. The RBI chief, speaking at a banking conclave, was upbeat on growth citing a good monsoon was likely to see a tick up in rural demand and reiterated there was a room for rate cuts going ahead, provided there was further transmission of rates by banks. However the MOF is probably likely to continue to apply pressure for early rate cuts as growth momentum remains muted. .Stock markets were pressured by the risk off sentiment across markets as outflows from emerging markets continued to tick up. Domestic yields climbed at the end of the week, with the ten year benchmark yield at 7.77% against 7.75% at the start of the week.  Today it has opened at 7.83%. Meanwhile IMF has downgraded India growth forecast this year to 7% against the earlier 7.5%.     

DXY slipped below its range over the last two weeks, as experts raised concerns on troubles in emerging market economies likely to raise the scepter of global deflation if it continued for longer. In the light of that, it would be difficult for the FED to effect, the token increase in US interest rates this year which was largely expected. This realization seems to have turned the market on its head with investors moving into a risk off mode with equities across the globe at record low levels. The S&P 500, has, for instance, given up all its gains in this year. This is despite the fact that the US data remains close to expectation or better.  Housing data was mostly better than expected with US Housing starts at an 8 year high. However jobless claims ticked up by 5000 to 277K and CB leading index fell to -0.2% against the earlier reading of 0.6%.  Flash manufacturing PMI was at 52.9 versus 53.8.

The Euro climbed higher, moving above 1.12 at the end of the week and opened at 1.45 at the start of the week, as it appreciated against the dollar as did the Yen and CHF on possible unwinding of carry trades. Data from the Eurozone remained close or better than expectations this week, but was ignored in light of the lack of movement in GDP and CPI data. Eurozone current account surplus improved to $25.4 billion even as the Greek PM Tspiras resigned at the weekend, with hopes of coming back stronger in a snap election to be held on Sep 20. He faces strong opposition from the members of his own party, despite the fact that Greece has received parliamentary approval for its third bail out plan.  The PMI numbers across the Eurozone weres better except for French manufacturing PMI which stayed below the expansion point of 50 at 48.6.

 The Yen stayed higher, moving down only at the end of the week on safe haven buying on account of troubles in China as the Caixin Manufacturing PMI came in at 47.8 versus an expectation of 48.2. Chinese equity markets continue to fall even though the Yuan depreciation of the previous week has stabilized, with higher fixings for Yuan through the latter half of last week.  However the risk off sentiment it has set off seems to have a mind of its own and there does not seem any let up in capital outflows from China and other emerging markets, despite the fact the dollar has actually become weaker this week. 

The outlook on oil and commodities continues to hinge on China as commodity currencies come under increasing pressure.  A small window on US exports of oil creaked open with the government allowing US oil companies to do a 1:1 swap of light sweet crude with Mexican oil companies doing refinery operations. However the protectionist lobby on oil remains strong and it is unlikely that much other leeway will happen in a hurry.  The Middle East continues to pump output at record levels and with Iran coming on stream, investors worry about a supply glut at a time of falling demand.  Inventories in the US are continuing to climb as the driving season in the US comes to an end. Currently Crude quotes at $ 40.89 and Brent is close to $44.70.

Gold moved higher on safe haven buying as global equities tanked with Dow falling to 10%  over the week accompanied by falling yields across emerging markets. Gold moved up sharply to trade at $1158 and is likely to keep climbing as VIX Index’s move higher across the globe.


MARKETS LAST WEEK (Aug 17-21)