Market News & Insights
5 February 2014

EM Currencies Catch a Break

EUR/USD 1.3510
GBP/USD 1.6293
GBP/EUR 1.2056 (0.8292)
EUR/CHF 1.2222
GBP/CHF 1.4735
GBP/AUD 1.8279

The sell off continued through yesterday morning but as the US session took hold risk appetite picked up, boosted by some strong earning releases as US equity markets finally started to show some gains. This tone carried over into the Asian session where the Nikkei rebounded from its biggest slump since last June, boosted by a massive 19% gain in Panasonic after its profits beat estimates. The pick up in risk has also seen some of the hardest hit EM currencies recover some lost ground against the USD, while the EUR and GBP also struggled for any meaningful moves.

The data calendar was light yesterday and as such the early session was following dominant risk trends, however a smaller than expected decline in US Factory Orders, -1.5% vs -1.8%, saw sentiment rise and along with some surprise earning reports helped to see gains through the end of the session.

Today is a little heavier on the data releases and with that we will be receiving the final round of Eurozone services PMI’s alongside the composite figure for the region. Data is due to be Euro supportive and show that like manufacturing, the services sector has grown as its fastest pace since June 2011. Any lift for the euro is likely to be only temporary as retail sales for the region is due to show declines of .7% in December and in the face of tomorrow’s much larger ECB meeting, which we’d expect to be dovish, the EUR may not have much space to run.

Despite the obvious signs of growth in the Eurozone it has failed to provide any relief from the weakening inflation trends, the constant pressure on a declining inflation rate is fuelling speculation the ECB will increase stimulus to combat any possible deflationary threat. It’s a waiting game for now but we think this will limit the single currencies upside for now.

The pound faced selling pressure when Monday’s manufacturing data missed to the downside and it will face its second test today as the UK release their Services PMI data. Due to show sector growth expanding to 59, should we have a repeat of December’s double PMI miss, the BOE maybe breathing a sigh of relief (on the forward guidance policy) as GBP will no doubt face further selling.

Later in US trading we will get a prelude to Friday’s Jobs data, the ADP employment report is due for release at 1.15pm followed later by the ISM non manufacturing release. The ADP is going to be a tricky gauge, it is expected to show the pace of job expansion has declined to 185k in January, however the December reading posted 238k jobs added, versus the NFP print of just 74k. There is little correlation between the figures and usually the ADP can only be relied upon for a guide on trend. This may remove any volatility around the release as markets ignore to focus on Fridays key release.