EM FX Technical Picture

MindMkts Blog ICON-FX TechPic

Similar to what we saw in February, EM is enjoying a nice bounce to start the month. Likewise, firmer oil is one factor, while actual (and potential) monetary stimulus is another. Yet those factors seemed to fade as February progressed. Will we see history repeat itself so soon in March? To us, the Fed tightening story is the wild card. The global liquidity outlook has moved in favor of EM for now, but rising expectations for a Fed rate hike would upset the apple cart.

Indeed, the Fed outlook is closely tied to the million dollar question: Has EM bottomed? Longer-term, we feel that the commodity situation remains murky as the supply-demand imbalance remains in place in many sectors (oil, copper, iron ore). We have always felt that a halt to the commodity plunge was a necessary but not sufficient condition for overall EM sentiment to improve. Fed tightening will eventually happen, and this should put the broad-based dollar rally back on track. Lastly, the global growth picture does not seem to favor EM just yet.

Bottom line: this EM rally could run for a while longer, but we still believe that EM turbulence will return later this year. With that in mind, we identify some possible retracement objectives from the EM sell-off that started in December. For those markets that have outperformed and recouped those losses, we will be looking at a broader move that started in October/November. Divergence within EM is likely to continue.

MSCI EM fell 15% from December 24 until January 21. It has now retraced about three quarters of that move and appears on track to test the December 24 high near 806.50. Going back a little farther, the retracement objectives from the November-January drop in MSCI EM come in near 780 (50%) and 802 (62%). A break above 802 would set up a test of the November 4 high near 873.

Latin America

Brazil: USD/BRL has retraced the entire late December-January rise. The break below the December 29 low near 3.84 sets up a test of the December 9 low near 3.7165 and then the November 24 low near 3.6935. The 200-day MA comes in near 3.67.

Chile: USD/CLP has retraced the entire November-January rise. The break below the November 4 low near 687 sets up a test of the October 9 low near 671. The 200-day MA comes in near 686.

Colombia: USD/COP has retraced around three quarters of the December-January rise. Break below the December 30 low near 3112 would set up a test of the November 20 low near 3027. Retracement objectives from the early November-February move come in near 3197 (38%), 3119 (50%), and 3040 (62%).   The 200-day MA comes in near 3018.

Mexico: USD/MXN has retraced almost two thirds of the mid-December-January rise. Break below the 62% retracement objective near 17.87 would set up a test of the December 16 low near 16.90. The 200-day MA comes in near 16.84.

Peru: USD/PEN has retraced about half of the mid-December-February rise. Break of the 62% retracement objective near 3.4345 would set up a test of the December 16 low near 3.37. The 200-day MA comes in near 3.30.

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 pretty much traded just above 27 since early November. We see the floor remaining in place until at least early 2017. The 200-day MA comes in near 27.09.

Hungary: EUR/HUF has retraced the entire December-January rise. The next level to look for is the August 3 (and February 22) low near 307. Retracement objectives from the big April-January move come in near 307.35 (50%) and 304.60 (62%). The 200-day MA comes in near 312.

Poland: EUR/PLN has retraced almost two thirds of the December-January rise. Break of the 62% retracement objective from that move near 4.3335 (62%) would set up a test of the December 25 low near 4.2235. The 200-day MA comes in near 4.26.

Israel: USD/ILS has retraced nearly the entire late December-January rise. A break below the December 25 low near 3.8565 would set up a test of the December 4 low near 3.8065. The 200-day MA comes in near 3.87.

Russia: USD/RUB has retraced almost three quarters of the late December-January rise. Break below the December 24 low near 69.24 would set up a test of the November 20 low near 64.34. The 200-day MA comes in near 66.15.

South Africa: USD/ZAR has retraced nearly three quarters of the mid-December-January rise. Break below the December 16 low near 14.81 is needed to set up a test of the November 20 low near 13.89. The 200-day MA comes in near 14.00.

Turkey: USD/TRY has nearly retraced the entire late December-January rise. Break below the December 25 low near 2.90 is needed to set up a test of the November 20 low near 2.8150. The 200-day MA comes in near 2.88.

Asia

China: USD/CNY has retraced around half of the late December-January rise. Retracement objectives from that move come in near 6.5325 (50%) and 6.5175 (62%). Break below 6.5175 would set up a test of the December 25 low near 6.47. The 200-day MA comes in near 6.3660.

Hong Kong: The USD/HKD peg will remain in place for the foreseeable future. After a brief move to the top half of the 7.75-7.85 trading band, the pair has since returned to the bottom half. Improved EM sentiment should keep it trading in the bottom half for now.

India: USD/INR has retraced over half of the December-January rise. A break below the 62% retracement objective from that move 67.12 would set up a test of the December 31 low near 66.09. The 200-day MA comes in near 65.63.

Indonesia: USD/IDR has retraced the October-January rise. Break below the October 15 low near 13230 would set up a test of the May 15 2015 low near 13033 and then the April 16 2015 low near 12810. The 200-day MA comes in near 13722.

Korea: USD/KRW has retraced nearly a third of the December-January rise. Retracement objectives from that move come in near 1214 (38%), 1204 (50%), and 1194 (62%). Break of 1194 would set up a test of the December 28 low near 1162. The 200-day MA comes in near 1169.

Malaysia: USD/MYR has almost fully retraced the October-January rise. The next level to look for is the October 9 low near 4.08. A break below 4.05 would set up a test of the July 22 low near 3.7850. The 200-day MA comes in near 4.14.

Philippines: USD/PHP has retraced nearly all of the January rise. Break below the January 6 low near 46.82 would set up a test of the November 4 low near 46.69. Retracement objectives from the big October-January move come in near 47.06 (38%), 46.75 (50%), and 46.44 (62%). The 200-day MA comes in near 46.555.

Singapore: USD/SGD has fully retraced the December-January rise. Break below the February 11 low near 1.3860 sets up a test of the October 15 low near 1.3725. The 200-day MA comes in near 1.3970.

Taiwan: USD/TWD has retraced almost two thirds of the late December-January rise. Break of the 62% retracement objective near 33 is needed to set up a test of the December 21 low near 32.50. The 200-day MA comes in near 32.40.

Thailand: USD/THB has almost fully retraced the October-January rise. The next levels to watch for are the February low near 35.20 and the October 15 low near 35.13. Retracement objectives from the June-October rise come in near 35.12 (50%) and 34.75 (62%). The 200-day MA comes in near 35.40.