Firming EM and commodity currencies – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that there has been significant divergence in emerging market currencies, but most are tending to strengthen unless undermined by specific domestic factors. 

Key Quotes

“The Indonesian Rupiah (IDR) has rallied to a new high this year; USD/IDR fell below a base-line since March. The Mexican peso has been weak on risks of a Trump presidency and lower oil prices.  MXN bounced back sharply after the first presidential debate and may have triggered a reversal of its recent weak trend.

The AUD has lifted in conjunction with the recovery in EM currencies. Lower yields are contributing to gains in higher yielding currencies.

Over the last week, the USD is also lower against JPY and EUR.  The JPY has retained a rising trend and is testing the key 100 level.  The JPY has strengthened since the BoJ meeting on 21-Sep where rates were essentially left unchanged against expectations that the BoJ might have cut the cash rate and steepened the JGB yield curve.

While yields have fallen and lifted demand for higher yielding assets, including EM and commodity currencies, equities have not sustained recoveries since the BoJ and FOMC meetings last week.  As such risk appetite is mixed.

Bank equities have been relatively weak, dragged down by European banks, led by Deutsche Bank.  Japanese banks have also given back some of the gains made in the lead-up to the BoJ meeting last week, undermined by the flattening in the Japanese yield curve and overall still very low yields, mostly below zero. The stronger JPY since the BoJ meeting is probably contributing to the curve flattening in Japan and weaker bank equities.

In contrast to the boost to most riskier assets from lower bond yields, bank shares have been dampened and are significantly under-performing other sectors.

Overall equity market performance has also been undermined by weaker energy shares recently.  Other material producer equites have also failed to bounce back in recent weeks, despite the fall back in government yields globally.”