Emerging market rally continues as investors chase yields

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8 April 2019


As trade tensions between the US and China recede, and Chinese data improves, investors are feeling increasingly comfortable with the macroeconomic and policy backdrop worldwide.

s a result, risky assets in general continue to perform well and recover from the sharp falls experienced in late-2018. Last week, almost every single major emerging market currency rallied against the US Dollar, while G10 currencies stayed in some of the narrowest ranges we have seen lately. The only exception was the New Zealand Dollar, down over 1%.

This week, the ECB and the Federal Reserve will drive currency markets. The latter will publish the minutes from its last meeting, while the former will hold its April meeting. We expect both central banks to reiterate to markets their willingness to remain in a wait-and-see pattern for the foreseeable future.

Major currencies in detail


Theresa May tried to break the stalemate over Brexit by opening talks with opposition leader Jeremy Corbyn. As this is written, little progress seems to have been made, and a long extension or series of extensions to the Brexit deadline appears increasingly likely.

The two key factors driving Sterling this week will be the progress, or lack thereof, on the May-Corbyn talks and the EU Council meeting on Wednesday that is expected to rule on May’s request of an extension to Brexit to 30th June.


The ECB received some further bad news last week after the preliminary core inflation rate for March came in at a worse-than-expected 0.8% versus 0.9% that the market had priced in (Figure 1). This remains far from the institution’s target of “close to, but below 2%” and its lowest level in almost a year. Retail sales for February in the Eurozone rose 2.8% from the previous year. All in all, it seems likely that the economy will continue to post moderate gains for 2019, supported by the ECB’s monetary stimulus.

Figure 1: Eurozone Core Inflation (2013 – 2019)

We do not expect any monetary policy changes at the April meeting on Thursday, but there will be some lively discussion around the ECB’s option should it want to make policy even more stimulative, and the effect of negative rates on the banking system.


Job creation in the US rebounded in March from the February dip. Labour data thus adds to the narrative that the slowdown seen in the early weeks of 2019 was a temporary phenomenon, likely driven at least in part by statistical quirks of seasonal adjustment in the first quarter.

In addition to the Fed minutes from the March meeting, inflation data out Wednesday will provide a test to the Federal Reserve’s new stance that it can be relaxed about inflationary pressures and hold rates unchanged for the remainder of 2019.