Emerging markets rally (Daily analysis 9.12.2020)

Markets have put brakes on the US dollar sell-off, yet the greenback treads water only marginally above long term lows. S&P 500 set new all-time highs on Tuesday. Emerging markets currencies advance in a benign risk environment as markets await key developments on various issues, predominantly the Brexit and US fiscal deal.

The main currency pair trades sidelined and a tad above the 1.21 mark as the common currency awaits the European Central Bank meeting on Thursday. The cable (the GBP/USD) has managed to recover half of this week’s pullback from the 1.3540 to which was triggered by a threat of the EU – UK talks collapse. The hopes for a trade deal are still alive as Prime Minister Boris Johnson heads to Brussels to meet with the European Commission President Ursula von der Layen and salvage Great Britain from a chaotic departure from the common market in three weeks time.

A fiscal deal or a government shutdown

Treasury Secretary Steven Mnuchin stated that he had presented the democratic House Speaker Nancy Pelosi a fiscal stimulus amounting to over USD 900 billion. Both Republican leaders and President Donald Trump are believed to be aware of the nature of the package. The offer is being considered at the time of writing. Although the news indicates progress in talks and points to a deal before the December 18th deadline, investors will remain prudent of the risk of a government shutdown in a case of disagreement.

Emerging currencies rally

The South African rand and the Czech koruna are the strongest performers. The Russian ruble extends its advance against the dollar to seven consecutive days, and consequently, the USD/RUB pair trades at the lowest levels since June. The Polish zloty and the Hungarian forint enjoy smaller gains due to a spat with the EU over the rule of law mechanism. The conflict might lead to excluding both countries from the Recovery Fund and implementing a provisionary budget for 2021. The topic will be discussed at the EU summit, which starts on Thursday despite not being on the agenda.

Conotoxia research team