Weekly Musings – Macro Quartet for the week ending June 14, 2024

24 Jun 2024 , 03:34 PM

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 first reason is the prospect of fewer interest rate cuts in the US; and with inflation well above the 2% target, the Fed is likely to proceed cautiously on rate cuts. A higher for longer approach will keep the dollar relatively strong.
• The interest rate cut by the European Central Bank (ECB) has already widened the rate gap between the US and the Eurozone, putting downward pressure on the euro against the dollar. The Macron crisis has only worsened the Euro story against the dollar.
• Much of the strength in the dollar is likely to come from weakness in other hard currencies. With the Pound Sterling trapped between potential dovish monetary policy and better UK and global growth data; the short term outlook for USD is strong.
• Finally, there is the critical USD/JPY trend continues to be driven by market expectations for Fed monetary policy. Yen has been weak against the dollar and even if the BOJ does intervene, the impact on yen weakness would be limited.

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.