Reported By:
| Edited By: Narayan S A |Source: DNA |Updated: Jun 18, 2018, 04:57 PM IST
This week, global risk sentiment grappled with the reigniting of global trade wars, an inconclusive G-7 (group of seven) meeting, disparate European Union (EU)-US views on Iran’s nuclear accord, a hawkish US Fed, compromising European Central Bank (ECB) and a cordial US-North Korea meet.
The weekend G-7 meeting was fractious and unconstructive after the US President Donald Trump refused to endorse the G-7 communique sticking to his stance that “trade should be reciprocal”. As expected, the US Federal Open Market Committee (FOMC) lifted its target for the federal funds rate by 25bps to 1.75-2% unanimously. It also raised 2018 GDP, inflation and employment forecasts pointing to the “solid” recovery and the fiscal stimulus. This optimism manifested in the FOMC’s median expectation of two more rate rises in 2018 and three more in 2019 helping the US dollar gain.
Initially, the Euro cheered the Italian government’s euro-optimism rising to $1.1840. Then the ECB decided to phase out its asset-buying program by end-2018 and pledged to keep interest-rates unchanged “at least through the summer of 2019”.
Oil prices softened on OPEC’s willingness to relax production curbs at its June 22 meeting to accommodate the shortfall in Venezuelan, Libya and in Iran post-sanctions. Emerging market currencies, especially LATAM, continued to feel the heat of the US tightening as funding large external financing needs in domestic political uncertainty proves difficult.
The rupee continued to react to the emerging market contagion weakening to 68.46/$ before the covert intervention, global dollar weakness and a 25bps repo rate hike by the Reserve Bank of India (RBI), strengthened it to 66.84/$. The repo rate hike also briefly pushed 10-year government yields above 8%.
May headline retail inflation rose to 4.87% on strong base effects and higher fuel prices while ex-food and fuel it rose by 6.17%, to a 45-month high. WPI rhymed by rising to 4.43%, a 14-month high. Industrial output in April rose 4.9% with manufacturing sector providing the boost. The year-on-year tripling of Q4 FY2018 CAD to $13 billion was also attributed to higher crude prices and tighter global monetary conditions. With the perfect economic storm brewing, in the coming weeks, we expect the rupee to target the all-time high of 68.87/$. Covert intervention and opportunistic exporter sales will only restrain the speed of the fall.
The writer is president-group treasury and retail broking, Kotak Mahindra Bank
