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- The Indian rupee crashed to a record low after the weak GDP data.
- The Kenyan shilling has stabilized ahead of the upcoming central bank decision.
- The US dollar index crashed last week after a series of economic data.
- The Mexican peso retreated and then bounced back after Donald Trump’s tariff threat.
Indian rupee hits a record low
The Indian rupee crashed to a record low after a shocker economic report last week. Data by the country’s statistics agency showed that the economy contracted in the third quarter. It grew by 5.4% in Q3, much lower than the median estimate of 7%. It was also the weakest growth rate in seven quarters.
Therefore, the weak numbers mean that the economy is struggling and is not benefiting as many companies shift their operations from China. Analysts now expect that the Reserve Bank of India (RBI) will deliver a 0.25% rate cut in its meeting this week. If this happens, it will bring the headline rate from 6.50% to 6.25%.
Economists have started to revise their India’s GDP estimate for the year downwards. Those at Goldman Sachs estimate that the economy will grow by 6% this year, down from 6.4%.
The Indian rupee has been one of the worst-performing currencies in the past few years as the USD/INR pair rose to a record high of 85.55. It has fallen by almost 17% in the past three years, a trend that many analysts expect will continue.
Kenyan shilling waits for a key rate cut
The Kenyan shilling has been one of the best-performing currencies this year as it jumped by over 20% against the US dollar. This rally happened as the country avoided defaulting on a key bond in June. It did that by extending the debt maturity and increasing the coupon rate.
The currency also rose as the central bank maintained hawkish tone by hiking interest rates to over 13%. Now, however, the bank has started cutting rates as inflation has dropped to about 3%, the lowest in the region. Analysts expect that the bank will cut rates again, bringing the official cash rate to 12%.
The Kenyan shilling has also jumped because of the wide spread between the country’s inflation and interest rates. This differential means that investors in government bonds have been making a positive return of over 10% in the past few months.
US dollar index retreats
The US dollar index has suffered a harsh reversal in the past few days as the recent Trump trade appeared to fade. The index, which tracks the performance of the greenback against a basket of currencies, has dropped from $108.05 to $105.78.
This decline accelerated after the US published a series of mixed economic data. These numbers showed that the initial jobless claims improved by 213k a week earlier, higher than the median estimate of 215k.
The country’s economy expanded by 2.8% in the third quarter, in line with the first estimate and what analysts were expecting. Another report showed that the personal consumption expenditure (PCE) rose from 2.1% to 2.3%, while the core PCE jumped to 2.8%. In a note, an analyst at Spartan Capital said:
We all expected that inflation would pop up a little bit, but inflation is not getting out of hand. And that's the key. This paves the way for a 25 basis point cut in December and then probably a pause. But the pause won't likely be due to inflation data, but because of uncertainties over Trump's tariffs. I think the Fed will grow cautious.Spartan Capital
Analysts expect that Trump’s policies will be inflationary as he has pledged to impose tariffs on most imports and deport millions of undocumented migrants. Such a move will be inflationary since these migrants account for most jobs in key sectors like construction and agriculture.
Mexican peso reacts to Trump tariff threats
The USD/MXN exchange rate rose to 20.50 and then pulled back to 20.37 after Donald Trump announced that he would add a 25% tariff on all imports from Mexico. He argued that Mexico and Canada were not doing enough to combat illegal migration to the US.
Those tariffs would go against the letter and the spirit of the USMCA, a trade deal that Trump signed in his first term. It would also have a big impact on the Mexican and US economies since the two countries do trade worth billions a year.
Analysts believe that the threat was a call to renegotiate the deal since the US has continued to have large trade deficits with Mexico. This explains why the Mexican peso bounced back in the first two days of the week.
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