EM FX Technical Picture

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Given the volatile price action seen this quarter 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. EM FX gained some temporary traction in early Q4, when soft US data pushed back Fed lift-off expectations.  Well, that early Q4 bounce in EM has ended, and we believe the market has returned to the medium-term bear trend. The point of this piece is to identify some potential retracement objectives for the main EM currencies from that bounce, as well as some longer-term targets.

Over the medium-term, we still retain a defensive posture with regards to EM and would recommend investors remain selective (see our recent EM FX Model Update). We expect further volatility and weakness ahead for most of EM FX, and so dedicated EM investors should look for relative value opportunities as well as opportunities to hedge. Divergences within EM will continue to be seen, with sliding commodities contributing to this divergence. In general, we continue to favor Asia, with EMEA next and Latin America last.

Latin America

Brazil: USD/BRL has yet to retrace much of the Q4 drop. Retracement objectives from that September-November drop come in near 3.9050 (38%), 3.97 (50%), and 4.0360 (62%). Break above 4.0360 would suggest a test of the all-time high near 4.25 from September.

Chile: USD/CLP has fully retraced the Q4 drop and made a new high for this cycle in November near 717.50, the highest since 2003. From a longer-term perspective, charts point to a test of the all-time high near 760 from October 2002.

Colombia: USD/COP has fully retraced the Q4 drop and made a new all-time high this month around 3328. From a longer-term perspective, there is an upward sloping channel on the weekly charts dating back to 2013. Top of that channel comes in around 3450, but it’s a pretty steep channel.

Mexico: USD/MXN has largely retraced the Q4 drop. The recent break of the 62% retracement objective from that move near 16.95 suggests a test of the all-time high near 17.34 from September. From a longer-term perspective, there is an upward sloping channel on the weekly charts dating back to 2012. Top of that channel comes in around 17.55.

Peru: USD/PEN has fully retraced the Q4 drop and made a new high for this cycle in November near 3.39, the highest since 2006. From a longer-term perspective, charts point to a test of the all-time high near 3.66 from September 2002.

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.  We see the floor remaining in place through 2016.

Hungary: EUR/HUF has retraced all of the Q4 drop. Break of the September high near 316 would suggest a test of the all-time high near 327.50 from January. From a longer-term perspective, there is an upward sloping channel on the weekly charts dating back to 2012. Top of that channel comes in around 340.

Poland: EUR/PLN saw little relief in Q4 and made a new high for this cycle near 4.35 this week. The pair is on track to test the January high near 4.3675 and then the December 2014 high near 4.40. From a longer-term perspective, a break above 4.3575 suggests a test of the December 2011 high near 4.60.

Israel: USD/ILS has retraced about half of the Q4 drop. Retracement objectives from the September-October drop come in near 3.8825 (50%) and 3.9020 (62%). Break above 3.9020 would suggest a test of the September high near 3.9650.

Russia: USD/RUB has fully retraced the Q4 drop and made a new high for this cycle near 70 this week. Charts point to a test of the all-time high near 80 from December 2014.

South Africa: USD/ZAR has fully retraced the Q4 drop and made a new all-time high this week near 14.70. From a longer-term perspective, there is an upward sloping channel on the weekly charts dating back to 2010. Top of that channel comes in around 15.25.

Turkey: USD/TRY has retraced about half of the Q4 drop. Retracement objectives from the September-November drop come in near 2.9165 (50%) and 2.9540 (62%). Break above 2.9540 would suggest a test of the all-time high near 3.0750 from September.

Asia

China: USD/CNY has almost fully retraced the August-November drop and is on track to test the post-devaluation high near 6.45 from mid-August. From a longer-term perspective, retracement objectives from the 2010-2014 drop come in near 6.4365 (50%) and 6.53 (62%). Break above 6.53 would suggest a test of the 6.8335 area, where CNY was “pegged” from mid-2008 to mid-2010 due to the financial crisis.

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.

India: USD/INR has fully retracted the Q4 drop and made a new high for this cycle last week near 67, the highest since 2013. From a longer-term perspective, the pair is on track to test the all-time high near 68.85 from August 2013.

Indonesia: USD/IDR has retraced about half of the Q4 drop. Retracement objectives from the September-October drop come in near 14029 (50%) and 14218 (62%). Break above 14218 would suggest a test of the cycle high near 14830 from September, the highest since 1998. From a longer-term perspective, charts point to a test of the June 1998 high near 16950.

Korea: USD/KRW has retraced over two thirds of the Q4 drop. The recent break of 1175 suggests a test of the cycle high near 1209 from September, the highest since 2011. From a longer-term perspective, charts point to a test of the May 2010 high near 1278. Also, retracement objectives from the 2009-2014 drop come in near 1233 (38%), 1303 (50%) and 1373 (62%).

Malaysia: USD/MYR has retraced about half of the Q4 drop. Retracement objectives from the September-October drop come in near 4.28 (50%) and 4.33 (62%). Break above 4.33 would suggest a test of the cycle high near 4.48 from September, the highest since 1998. From a longer-term perspective, charts point to a test of the all-time high near 4.8850 from January 1998.

Philippines: USD/PHP has fully retraced the Q4 drop and made a new high for this cycle in November near 47.35, the highest since 2009. From a longer-term perspective, charts point to a test of the November 2008 high near 50.17.  Retracement objectives from the 2004-2008 drop come in near 48.375 (50%) and 50.30 (62%). Break above 50.30 would suggest a test of the all-time high near 56.50 from February 2004.

Singapore: USD/SGD has retraced about half of the Q4 drop. Retracement objectives from the October drop come in near 1.4050 (50%) and 1.4125 (62%). Break above 1.4125 would suggest a test of the cycle high near 1.4365 from October, the highest since 2009. From a longer-term perspective, break above 1.4210 would suggest a test of the March 2009 high near 1.5580.

Taiwan: USD/TWD has retraced over two thirds of the Q4 drop. Break above the 62% retracement objective from the September-October drop near 32.85 would set up a test of the cycle high near 33.33 from September, the highest since 2009. From a longer-term perspective, charts point to a test of the March 2009 high near 35.25.

Thailand: USD/THB has retraced over half of the Q4 drop. Break above the 62% retracement objective from the October drop near 36.08 would suggest a test of the cycle high near 36.67 from October, the highest since 2006. From a longer-term perspective, break of 37.00 would suggest a test of the July 2005 high near 42.20.