Euro cheered the EU-Italy budget resolution and the end of European Central Bank's (ECB) asset purchases but collapsed on the "flash crash" back to $1.13.
In 2019, the global markets remain risk averse with the partial US government shutdown, unresolved Brexit, continuing Sino-US trade talks and moderating global activity. The "flash crash" in the Yen in early January also showed the extent of market nervousness.
The US dollar index traversed the 95-97 range as over-bought speculative positioning balanced out a defiant Fed, a belligerent President and decelerating economic momentum. The US Federal Open Market Committee (FOMC) hiked the fed funds rate by 25bps, the fourth time this year, despite White House hostility. It pruned growth and inflation forecasts while forecasting a gentler hiking path. The US government lapsed into a partial shutdown on the political gridlock over the Mexican border wall disagreement with the Democrats. Markets got worried about the flattening of the yield curve, signalling a slowdown prompting cautious comments by Fed members. However, the bumper December employment report caused a smart stock market recovery.
Euro cheered the EU-Italy budget resolution and the end of European Central Bank's (ECB) asset purchases but collapsed on the "flash crash" back to $1.13. Despite the weakening growth outlook for Europe, out of the EU-US trade war, the populist protests in France and weakening German industrial activity, the Euro surged past $1.15, primarily due to the softening US dollar.
The pound scaled $1.28 on expectations of Brexit deferment by Europe should Prime Minister Theresa May lose the UK Parliament vote on the withdrawal deal scheduled on January 15. The UK Parliament voted to force on the government its pre-approval in case of a no-deal Brexit also giving them only three days to present the next course of action. The pound will certainly turn volatile as the vote nears.
After September 2018, the Yen strengthened from 114/$, on global risk aversion, dipping beyond 105/U$, on the "flash crash". The January 3 crash was provoked by Apple Inc.'s Q1 2019 profit warning based on China's sharp demand contraction, at an illiquid time of the trading day and exaggerated by the short speculative Yen positioning. However, it rebounded to 109/$ on the US-China trade deal optimism.
Brent crude dipped toward U$50p/b despite the Opec+ agreement to cut production by around 3% in 2019. The demand shortfall, out of the global macro gloom, overturned the anxiety of the supply crunch, causing this drop. But since then it has picked up to near $62p/b, on Saudi Arabia's tough talk.
In mid-December, the rupee weakened to 72.47/$, pre-Opec oil output decision was out, RBI governor Urjit Patel's resigned and the ruling BJP lost elections in three key Indian state elections. However, the subsequent oil price collapse and the well-received new Reserve Bank of India (RBI) governor Shaktikanta Das pulled it back to 69.4250/$. Since then the higher oil price and RBI's presence has pushed the rupee weaker to 70.65/$. The central bank's repetition of its pledge to conduct ample open market operations(OMO) purchases into Q1CY2019 and its soft inflation forecasts helped government-10 year yields soften on hopes of the RBI policy stance change to 'accommodative' next month.
Near-term we expect the rupee to stay in the 69.50-71.00/$ range with the risk of a global stock market sell-off, on the failure of the US-China trade talks or on a global recession.
The writer is president-group treasury and retail broking, Kotak Mahindra Bank
VOLATILE RIDE
- Near-term we expect the rupee to stay in the 69.50-71.00/$ range
- RBI's repetition of its pledge to conduct ample OMO purchases into Q1CY2019 and its soft inflation forecasts helped government-10 year yields soften
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The pound scaled $1.28 on expectations of Brexit deferment by Europe should Prime Minister Theresa May lose the UK Parliament vote on the withdrawal deal scheduled on January 15. The UK Parliament voted to force on the government its pre-approval in case of a no-deal Brexit also giving them only three days to present the next course of action. The pound will certainly turn volatile as the vote nears.
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