Emerging market currencies rally in mixed week for risk assets

Last week saw some positive trading action in most emerging market assets, particularly currencies.

We have been pointing to the cheap valuation of many of them, and the fact that most of them managed to post respectable gains in spite of a lackluster week for other risk assets is certainly encouraging. Beyond emerging markets, the euro, sterling and the dollar kept to tight trading ranges.

Near-term trading is likely to be driven by the tension between positive vaccine news and the more immediate negative effect on economic data of the new lockdown measures worldwide. We should see this specially in the Eurozone PMI numbers out today. The Thanksgiving holiday in the US traditionally means a quiet trading week in financial markets, so we expect no major currency moves until December.

GBP

Brexit negotiations are proceeding at a glacial pace, but for now general optimism about COVID vaccine developments is putting a floor under sterling. News this morning from Oxford University regarding the effectiveness of its vaccine has given the pound a big leg up so far today, given that the UK would be at the front of the queue for receiving doses that are both far cheaper and easier to transport than others already developed.

As in the Eurozone, this week's most important event is the release of the PMIs of business activity. Expectations are for a fairly dramatic drop in the services component, on the back of the renewed lockdowns we saw last month. We think there is potential for a number that is less bad than the market expects, which may possibly lead to a short-term rally in the pound.

EUR

There are some reports about the EU budget being delayed by political noise from Hungary and Poland, but we are skeptical that anything so critical in these current times will be held up for long. 

A more immediate concern, as in the UK, is the release of the November PMIs today, which will undoubtedly paint a grim but backward-looking picture. Markets will have to balance the latter with the prospects for a vaccine and the signs that the major countries may have seen the top of the second COVID wave. Expect the euro to trade in a holding pattern, waiting for the critical December meeting of the European Central Bank.

USD

The positive impact of the progressive dismissal of Trump's attempt to overturn the result of the US election was balanced out by the worsening pandemic news in most states. As this is written, the news that the US may start vaccinating people in less than three weeks is putting a modest bid on risk assets, with little visible effect on currency markets.

This week, the release of the last Federal Reserve meeting minutes on Wednesday may attract some attention, but the Thanksgiving holiday on Thursday diminishes the chances of a meaningful market reaction in what is traditionally one of the quietests trading periods of the year.

🎙  Listen to the latest FX talk episode on Spotify