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EM currencies rally on the back of rebounding commodities

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1 June 2021

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The key financial market themes of the last six months were replayed last week.

C
ommodities bounced back strongly, inflation data out of the US surprised to the upside, and risk assets rallied, with commodity-sensitive emerging market currencies taking the lead. Rates in G10 countries are still in a holding pattern, but we think it is only a matter of time before they resume their march higher amid stronger than expected economic recoveries elsewhere and relentless pressure on supply chains and ultimately prices. In keeping with these themes, the Brazilian real, the Chilean peso and the New Zealand dollar were the winners last week, and the safe-haven Japanese yen was unsurprisingly the worst performer.

This trading week is shortened by the London and New York Monday holidays, but will nevertheless be rich in data. Inflation data in the Eurozone for May comes out Tuesday, and will show the extent to which inflationary pressures there follow the US upward path with a lag. Later on Tuesday, the US ISM index will be released, and there will be special focus on the prices paid component. Finally, Friday we will get the latest read on the state of the US jobs market via the payrolls report for May, where booming demand is expected to run into labour market frictions leaving the numbers subject to an unusual amount of uncertainty.

GBP

A booming recovery led by the manufacturing sector, as reflected by the PMI indices of activity, and hawkish noises from the Bank of England propelled sterling to second place in last week’s G10 FX performance tracker.

While we think that the pound rally may take a short-term breather, especially given the lack of market-moving news this week, we think the Bank of England may lead the Federal Reserve and the European Central Bank in the process of withdrawing monetary stimulus from the economy, which can only be a positive for the currency. The shortened UK trading week is relatively light on economic data, aside from revised PMI numbers. Investors will, however, have comments to digest from Bank of England governor Andrew Bailey on Thursday.

EUR

Some dovish comments from ECB council members have stopped the euro rally, for now. While markets remain focused on the ECB meeting on 10th June, we think this week’s preliminary inflation data for May will receive more than the usual amount of attention.

An increase to precisely the ECB target of just below 2% in the headline number is already priced in, as is a more modest jump in the core subindex that excludes volatile food and energy components, to a level still below target in the latter. However, strategists have recently lagged in adjusting upwards their estimates of inflation worldwide, so we think there is room for a positive surprise that would buoy the common currency.

USD

Another week, another upward surprise in inflation data out of the US. Last week it was both the first quarter GDP deflator and the more timely personal consumption expenditures (PCE) deflator, which is the preferred inflation metric of the Federal Reserve. Bond markets are taking this in stride for now, and the 10 year Treasury yield ended the week not far from where it had begun.

In addition to the key but lately somewhat murky payroll number on Friday, there are a number of Fed policymakers giving speeches this week. We will be paying close attention to see if the consistent surprises in the inflation numbers are starting to shift the overwhelmingly dovish consensus among FOMC members.

Listen to our latest FX Talk episode for a 20-minute market update:

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