EM FX Technical Picture

MindMkts Blog ICON-FX TechPic

Given the extreme price action seen this past month in EM currencies, we thought it would be a good idea to again take a step back to see how EM FX has performed in the bigger picture. 

Recall that EM currencies ended 2014 on a very weak note, with the sell-off continuing into March before soft Q1 US data pushed back the timing of Fed lift-off.  Most EM currencies then gained some limited traction in the March-May period, but the EM asset class sold off again in April/May when the US economy got back on track.  EM then weakened sharply and many went on to establish multi-year and/or all-time lows ahead of this bounce.

Like the March-May bounce, we view this current EM bounce as a correction in an extremely oversold market.  Given the magnitude of EM FX weakness this year, most currencies have barely undergone any sort of significant correction.  As such, we look for further short-term EM gains that should give way to an eventual resumption of the long-term bearish EM move.  The point of this piece is to identify some potential retracement objectives for the main EM currencies.

Over the medium-term, we still retain a defensive posture with regards to EM and would recommend investors remain selective.  We expect further volatility and weakness ahead for most of EM FX, and so dedicated EM investors should look for relative value opportunities.  Divergences within EM will continue to be seen.  In general, we continue to favor Asia, with EMEA next and Latin America last.

Latin America

Brazil:  USD/BRL made a new all-time high last month around 4.25.  The previous high was near 4.0 from October 2002.   Retracement objectives from the April-September rise come in near 3.7265 (38%), 3.5650 (50%), and 3.4040 (62%).

Chile:  USD/CLP made a new high for this cycle last month near 710, the highest since 2003.  Retracement objectives from the May-September rise come in near 665 (38%), 651 (50%), and 638 (62%).

Colombia:  USD/COP made a new all-time high last month around 3266.  The previous high was near 2980 from January 2003.  Retracement objectives from the May-August rise come in near 2917 (38%), 2809 (50%), and 2701 (62%).

Mexico:  USD/MXN made a new all-time high last month near 17.35.  The previous high was near 15.60 from March 2009.  Retracement objectives from the April-September rise come in near 16.35 (38%), 16.05 (50%), and 15.75 (62%).

Peru:  USD/PEN made a new high for this cycle in August near 3.31, the highest since 2006.  Retracement objectives from the March-August rise come in near 3.2140 (38%), 3.1840 (50%), and 3.1540 (62%).

EMEA

Czech:  EUR/CZK has not really traded with the rest of EM ever since the CNB instituted the floor “near” 27 back in November 2013.  The pair has drifted lower this year from 28 to near 27 currently, and has led the central bank to undertake some FX intervention.

Hungary:  EUR/HUF made a new all-time high near 328 back in January.  The previous high was near 324 from January 2012.  Retracement objectives from the April-July rise come in near 310 (38%), 307 (50%), and 304 (62%).

Poland:  EUR/PLN has traded within fairly narrow ranges this year.  Retracement objectives from the April-August rise come in near 4.15 (38%), 4.12 (50%), and 4.08 (62%).

Israel:  USD/ILS has traded within fairly narrow ranges this year.  Retracement objectives from the June-September rise come in near 3.8550 (50%) and 3.83 (62%).

Russia:  USD/RUB made a new high for this cycle in August near 71.70.  The all-time high was near 80 from December 2014.  Retracement objectives from the May-August rise come in near 62.70 (38%), 59.90 (50%), and 57.13 (62%).

South Africa:  USD/ZAR made a new all-time high last month near 14.16, just edging out the previous high from August.  Before that, the previous all-time high was near 13.84 from December 2001.  Retracement objectives from the May-September rise come in near 13.22 (38%), 12.93 (50%), and 12.65 (62%).

Turkey:  USD/TRY made a new all-time high last month near 3.0750.  Retracement objectives from the May-September rise come in near 2.88 (38%), 2.82 (50%), and 2.76 (62%).

Asia

China:  USD/CNY traded in August at highs not seen since 2011.  Retracement objectives from the May-August rise come in near 6.35 (38%), 6.32 (50%), and 6.29 (62%).

Hong Kong:  The USD/HKD peg will remain in place for the foreseeable future.  Despite broad-based EM FX weakness, HKD remains near the strong end of its 7.75-7.85 trading band due to inflows from mainland China.

India:  USD/INR made a new high for this cycle last month near 67, the highest since 2013.  Retracement objectives from the April-September rise come in near 65.06 (38%), 64.50 (50%), and 63.93 (62%).

Indonesia:  USD/IDR made a new high for this cycle last month near 14830, the highest since 1998.  Retracement objectives from the April-September rise come in near 14057 (38%), 13819 (50%), and 13581 (62%).

Korea:  USD/KRW made new highs for this cycle last month near 1209, the highest since 2011 and matching the October 2011 high near 1208.  Retracement objectives from the April-September rise come in near 1154 (38%), 1137 (50%), and 1120 (62%).

Malaysia:  USD/MYR made a new high for this cycle last month near 4.50, the highest since 1998.  Retracement objectives from the April-September rise come in near 4.12 (38%), 4.01 (50%), and 3.90 (62%).

Philippines:  USD/PHP made a new high for this cycle last month near 47.06, the highest since 2010 and matching the May 2010 high near 47.13.  Retracement objectives from the April-September rise come in near 46.00 (38%), 45.61 (50%), and 45.27 (62%).

Singapore:  USD/SGD made a new high for this cycle this month near 1.44, the highest since 2009.  Retracement objectives from the May-October rise come in near 1.39 (38%), 1.3765 (50%), and 1.3625 (62%).

Taiwan:  USD/TWD made a new high for this cycle last month near 33.33, the highest since 2009.  Retracement objectives from the May-September rise come in near 32.19 (38%), 31.84 (50%), and 31.49 (62%).

Thailand:  USD/THB made a new high for this cycle this month near 36.67, the highest since 2009.  Retracement objectives from the April-October rise come in near 35.00 (38%), 34.50 (50%), and 34.00 (62%).