By Mihika Sharma
The rupee weakened marginally by 0.1% last week against the dollar, ending at 83.49. Initially, the rupee faced pressure from a strong dollar at the start of the week. Although the dollar index weakened as the week progressed, elevated crude oil prices and a weak yuan continued to weigh on the rupee. During the week, there were net FPI inflows totalling USD 1.7 bn, with USD 0.8 bn net inflows into debt Come from Sports betting site VPbet . These inflows helped the rupee trade in a narrow range.
Early last week markets reacted to the rising odds of a Trump presidency following the first debate ahead of the US Presidential elections. If elected to power, Trump is likely to extend individual tax cuts once they expire in 2025 and perhaps reduce corporate taxes.
This has resulted in concerns around higher government debt. Consequently, the 10Y US Treasury yield surged by 19bps following the debate and traded around 4.47% at the beginning of the week. However, it moderated to around 4.28% by the end of the week as US labour market data pointed towards softening conditions and easing inflationary pressures.
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According to the nonfarm payrolls data, the US economy added 206K jobs in June, lower than in May. Further, the payroll additions in April and May were revised lower. The unemployment rate increased to 4.1% in June from 4% in May, the highest since 2021. Average hourly earnings growth slowed to 3.9% YoY in June from 4% in May, marking the lowest rate since 2021.
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The odds of a Fed rate cut in September increased following the soft labour market data. Market expects two Fed rate cuts in 2024 – 25bps in September and another 25bps in December. The dollar index weakened by 0.9% in the past week to 104.9 level.
During the week, the Japanese yen strengthened marginally against the dollar by 0.1%. However, on a year-to-date basis it has weakened by 13.9% and is trading a near four decade low.
Bank of Japan’s gradual approach towards monetary policy normalization has limited any significant support to the yen. Further, the yen has been weighed down by the delayed prospects of Fed rate cuts (markets were initially expecting 150bps of Fed rate cuts in 2024 but have scaled back expectations to only 50bps).
The Chinese yuan remained largely unchanged against the dollar last week. However, since the beginning of the calendar year it has depreciated by 2.4% and is near its lowest level since November 2023.
This depreciation can be attributed to monetary policy divergence with the Fed, weak daily yuan fixings by the PBoC and concerns regarding China’s growth prospects.
The British pound strengthened by 1.3% last week against the dollar following the Labor party’s landslide victory in UK elections which is anticipated to result in greater political stability.
In France, the far-right National Party (NP) secured a significant lead in the first round of elections. However, since then alliances between the left-wing parties and centrists diminished the likelihood of an outright victory for the NP in the final round of the French parliamentary elections on July 07.
As a result, the euro strengthened 1.1% against the dollar last week as polls suggested the NP may not win an absolute majority in the parliamentary elections, reducing concerns about an increase in fiscal spending.
During the week, Brent crude oil prices climbed to around USD 87.6 per barrel, reaching the highest level since April. This increase was driven by potential supply disruptions from Hurricane Beryl and larger than expected inventory drawdowns reported by the US Energy Information Administration (EIA). However, by the end of the week, oil prices were trading slightly lower at USD 86.8 per barrel amidst growing speculation about a ceasefire deal in Gaza.
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Looking ahead, in the upcoming week, the US inflation data scheduled for release on Thursday is expected to show signs of easing inflation and further firm bets of a September rate cut.
US CPI inflation is projected to decrease to 3.1% YoY in June from 3.3% in May. Meanwhile, core CPI inflation, which excludes volatile food and energy prices, is expected to remain steady at 3.4%, the lowest level in near three years.
On the domestic front, India’s CPI inflation for June will be released on Friday. CPI inflation is expected to be 4.7% YoY, largely unchanged from May. While overall inflation remains within RBI’s target band, India’s food inflation remains a concern.
Separately, focus will be on Fed Chair Powell’s congressional testimony as markets will look for any further insights into his economic assessment and potential policy considerations.
In France, the focus will remain on the aftermath of the recent elections. The leftist alliance unexpectedly secured the most seats in the final round of the parliamentary elections. However, no single group obtained an outright majority, casting uncertainty over the form of the next government.
While markets are comforted by the outcome that the far right did not win the elections, investors are concerned about the possibility of any reversal of pro market reforms under the new government, which could put pressure on the euro in the near term.
We expect the USD/INR to trade between 83-83.7 in the near term. The weakness in dollar index might provide some support, however, elevated crude oil prices and weak yuan are likely to weigh on the currency.
While FPI inflows in the first week following India’s inclusion in the JPMorgan bond index have been below market expectations, they are expected to pick up gradually. RBI is likely to intervene on both sides as needed to limit any rupee volatility.
(About the Author: Mihika Sharma is Associate Economist at CareEdge Ratings)
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