Central Bank Concerns Crush EM, Bounce Likely

Yesterday’s session was another bloodbath for emerging markets currencies, but the largest gain of the day came from the JPY against the USD. The Bank of Japan’s decision to hold policy as is for the next month disappointed the market who had bet upon some form of additional easing.

As we have been keen to emphasise throughout these updates, and during last week’s central bank webinar, the combination of the world’s three largest central banks openly sounding off that the free liquidity party may be coming to an end has made a significant impact.

I believe these fears are overdone in the short term as it seems that the market is anticipating a quick, sharp, stop to the Fed’s ultra-loose monetary policy. Whereas, in all likelihood, the withdrawal of stimulus will take as long as its injection. The ripples of the extraction of stimulus will rock the markets for a while yet, unfortunately.

The winners in the FX world yesterday were the low yielders (JPY, USD, CHF, GBP and EUR) whereas the currencies that have gone so well when the going has been good (AUD, NZD, ZAR, MXN and INR) were taken to the wood shed.

Euro, in particular, has been performing extremely well and is up against every day since Draghi’s press conference last Thursday. News from the German Supreme Court’s case around the ECB’s use of the OMT bond buying program had little effect on the single currency. The importance of this case will be felt closer to the German general election in September as it is likely to echo popular sentiment on additional help for the rest of the Eurozone.

Today’s focus will the UK’s latest labour market numbers that we hope will show a rebound in pay growth (although this may be as a result of bonus-takers holding over payment until after the new tax year) and a decent drop in those claiming jobless allowances.

Yesterday’s industrial and manufacturing numbers continue to show that the path to continued, sustainable strong growth in the UK will be a long one and that further help for these sectors is needed to further secure the recovery.

Industrial production rose by 0.1% in April and maintains the recent data trend of steady, if small, improvements. The overall growth profile remains one of ‘bouncing along the bottom’ however.