Emerging market currencies continue to rally as investors bid up risk assets

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1 July 2019


The miserly yields available throughout the G10 fixed-income universe continued to push investors into higher-yielding emerging markets last week.

10 currencies continue to stagnate against each other while EM currencies rally. Last week’s winners were the Indonesian and Indian Rupias as well as the South African Rand. The Euro held the Dollar to a draw, while Sterling struggled again on investors jitters about a no-deal Brexit.

This week, currency markets will be dominated by the apparent easing in trade tensions between China and the US after the G20 meeting over the weekend. This development should be positive for risk assets in general, and emerging market currencies in particular. On Friday, the US payroll report will be critical. We will see whether markets pricing in almost four full interest rate cuts in the US have got ahead of themselves.


News that the front runner in the Conservative leadership contest is preparing a budget for a no-deal Brexit is unlikely to help Sterling over this week. While a recent revision confirmed that the UK growth held better than most expected in Q1, printing around a 2% annualized rate, markets continue to be completely focused on the prospect of a no-deal Brexit. We are unlikely to see any market-moving developments on this front. However, the release of the PMI indices of business activity between Monday and Wednesday should give us an early look at the impact the renewed Brexit uncertainty is having on business activity.


The key flash inflation report for June had some modestly positive news. The core indicator which excludes volatile food and energy components improved to 1.1%. While this is still way below the ECB’s target, the huge jump of 0.3p.p. in one month gives us some hope that we are finally seeing the beginning of a sustained upward trend. Given the massive speculative bets against the Euro, we expect any good macroeconomic news out of the Eurozone to have an outsized positive impact on Euro trading.


Fed officials seemed to rule out the possibility of a 0.5% cut in July, which helped the 10-year Treasury bond yield remain just above the 2% level and offered some support for the Dollar against its major G10 peers. We have a key macroeconomic release on Friday. The US payroll report for June will tell us whether the previous month’s weakness was a statistical fluke or the beginning of a slowdown. If, as we expect, the former is true, we could see a rather sharp correction of the exuberant expectations for cuts priced into US markets.