Ebury: Emerging market currencies bounce on upbeat Chinese data

By Enrique Diaz-Alvarez, Chief Risk Officer.

While the Federal Reserve's September meeting had been the market focus last week, the FOMC didn't surprise markets and the market impact was muted. The modest rally in most emerging market currencies likely had more to do with positive economic news, particularly out of China, and the absence of any major negative headlines regarding the pandemic. Sterling bounced back as Prime Minister Johnson's controversial bill will give Parliament final say in any decision to go back on the terms of the withdrawal agreement. The most important news this week will be the PMI indices of business activity. It is true that the pandemic disruption has made these harder to interpret, so markets will also be paying close attention to the negotiations on additional stimulus in the US and a Brexit agreement in the UK.

GBP

Boris Johnson's partial retreat on the issue of breaching the Withdrawal Agreement with the EU, by allowing Parliament to have a final say in the matter, did much to stabilize sentiment in Sterling and send the currency higher for the week against most major peers. The Bank of England did not cut rates but implied that negative rates remain a possibility. September "flash" PMI indices of business activity are the most important data release, with consensus expecting a modest retracement while maintaining healthy expansionary levels.

EUR

The worsening COVID numbers out of the Eurozone were highlighted in a dramatic fashion by the partial reimposition of lockdown measures in the worst affected parts of Madrid. However, the second wave of the pandemic has yet to make a significant impact on the Euro, possibly because this second wave seems less deathly and it hasn't so far had a significant impact on the economic recovery. For now, the common currency seems to be stuck in a holding pattern against the US dollar, in the 1.17 to 1.20 range. We see no catalyst for this to change much this week.

USD

The FOMC did not surprise markets last week. Most Fed members expect to keep rates at zero through the end of 2023. The reaction from markets seemed to imply that expectations may have been for an even more dovish message somehow, as equities struggled somewhat in the aftermath. Meanwhile, high frequency labor market indicators such as weekly claims for unemployment insurance continue to outperform expectations. We believe that we are likely to get some bipartisan compromise on additional fiscal stimulus soon, which in the context of still stretched short dollar positioning among speculators may provide short term support for the greenback.