Can weak US data provide sustained support to EM and commodity currencies like during the QE era?

Stocks and EM FX rallied after the worse-than-expected NFP. The market seems to be taking comfort in the likelihood that the slowdown of the US labor market could keep the Fed on hold for even longer.

The fact is that since the September FOMC meeting when the Fed kept rates on hold, inflation breakevens have declined further while credit spreads have widened. Until these two key channels of monetary policy begin to respond more enthusiastically to the outlook of easier policy, we are wary of celebrating too soon.

If investors have until now looked to the US as the only bright spot in the world economy, the possibility the US could be succumbing to recoupling pressure is bad news for the crowded decoupling trades. The fact announced layoffs have spiked recently and are approaching the highest since 2011 suggests the weak September NFP may not be a fluke.

Interestingly, the new orders components of ISM manufacturing and Chinese PMI both fell in September to the lowest since August 2012, the peak of the Eurozone crisis. If it took both the ECB's OMT and the launch of QE3 by the Fed to arrest the downward momentum of the global economy in fall 2012, the scope for policy easing this time around is likely much more limited. Or rather, believe things probably have to get a lot worse to give an excuse to policymakers to ride again to the rescue

"We are cognizant of the fact pessimism has taken hold over the past month and general positioning in the market is quite defensive. Nevertheless, it is difficult for us to see how weak US data can provide sustained support to EM and commodity currencies like during the QE era",says BofA Merrill Lynch.