Emerging market currencies stabilise after another rough week

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10 September 2018

thomasdodds

A raft of weak Chinese data started the ball rolling on yet another emerging market sell-off earlier in the week.

T
he rout accelerated into Wednesday, but most major currencies managed to stabilise and bounce back somewhat into the weekend. The biggest losers were the Russian Ruble and the South African Rand, but this time the pain spread to Asian currencies as well.

The biggest news of the week outside of emerging markets was the monthly payrolls report out of the US. While the unemployment and participation rates came in slightly less-than-expected, wage gains jumped to 2.9% from a year ago, above the 2.7% that the market had pencilled in. US rates jumped as a result, and the 10-year treasury yield ended at its highest level in a month. It is perhaps a hopeful sign for emerging markets that they managed to take higher US rates in their stride during Friday trading.

This Thursday promises to be a volatile day in the currency markets, with both the Bank of England and the European Central Bank (ECB) to hold their September meetings.

Major currencies in detail

GBP

While we had mixed news from the PMI indices of business activity, the Pound continues to largely ignore economic news and trade in reaction to the latest rumors or headlines from the Brexit negotiations. As it turned out, the Pound ended the week more-or-less where it started, although we are beginning to see hopeful signs that EU positions are softening and remain of the opinion that markets are overestimating the likelihood of a hard Brexit.

The key source for Sterling volatility will be the September meeting of the Bank of England this week. No change in policy is expected but the voting pattern and minutes of the meeting will be closely scrutinised.

EUR

The Eurozone flash PMI indices of business activity were little changed as expected last week. The Euro traded the week in tight ranges against its major peers and ended almost where it had started.

The ECB meets on Thursday this week. As in the UK, no change in policy is expected. We will, however, be very keen to hear what President Draghi has to say on two critical issues. Firstly, the conflict with the right-populist Italian Government. Second, the continued failure of core inflation to start a clear cut upward trend towards the ECB’s target.

USD

Economic data was fairly strong in the US last week. This was particularly the case in the key monthly report from US payrolls. While the headline number was marred by downward revisions to the previous months, and unemployment ticked up slightly, more important was the unexpected jump in wage gains to 2.9%. If this improvement is confirmed in subsequent reports, it could well be the case that the tightness of the US labour market is finally forcing employers to bid up labour with higher wages. This, we believe, would probably mean faster Federal Reserve hikes and possibly a stronger US Dollar.