EM FX Technical Picture

MindMkts Blog ICON-FX TechPicIs EM FX finally turning (again)?  The last time we asked this question on August 4, much of EM FX went on to weaken through mid-August before reversing.  The dollar went on to make new cycle lows vs. EM FX through early September.  Trading has been choppy this month, but the broad-based dollar gains seen post-FOMC suggests its rally is back on track.

We saw a similar dynamic in EM equities.  MSCI EM bottomed on August 11 and put in a high on September 18.  It has nearly given back half those gains, as the next retracement objectives from that rise come in near 1077 (50%) and 1068 (62%).  We saw the biggest drop yesterday in percentage terms for MSCI EM since August.  We are also seeing the first 4-day slide since April 6-11.  Break of 1068 would target the August low near 1040.  The 200-day MA comes in near 989.

EM stocks are finally following EM FX lower.  This is the way it should be but over the last week or two, the two had decoupled a bit.  To illustrate that decoupling, we looked at the correlation of MSCI EM and MSCI EM FX.  It had fallen to 0.45 this month from almost 0.85 back in May and over 0.90 back in July 2016.  This correlation has ticked up in recent days to 0.51, and is likely to head even higher.

We warned last month that the rand may be the so-called “canary in a coal mine” for EM and needs to be watched closely.  This still holds true.  The rand has been the worst performer (-2% vs. USD) in H2 after being amongst the top performers (+5% vs. USD) in H1.

We focus on ZAR because we think it has been one of the biggest beneficiaries of the quest for yield by investors.  Yet ZAR has always been one of our least favorite EM currencies.  South Africa comes with very weak fundamentals, as well as heightened political and downgrade risks.  Though the high yields have attracted hot money flows, the SARB is now cutting rates.  This should ultimately weigh on the rand’s attractiveness.  

Latin America

Brazil:  USD/BRL couldn’t break below 3.08 and has turned higher.  The low for this move was recorded on September 11.  Using the August-September drop, the final retracement objective comes in near 3.1660 (62%).  Clean break would target the August high near 3.22.  The 200-day MA comes in near 3.1850.

Chile:  USD/CLP couldn’t sustain a break below 615 and has turned higher.  The low for this move was recorded on September 7.  Using the August-September drop, the next retracement objectives come in near 635 (50%) and 640 (62%).  Break of 640 would target the August high near 655.  The 200-day MA comes in near 655.

Colombia:  USD/COP couldn’t sustain a break below 2900 and has turned higher.  The low for this move was recorded on September 20.  Using the August-September drop, retracement objectives come in near 2937 (38%), 2952 (50%), and 2967 (62%).  Break of 2967 would target the August high near 3016.  The 200-day MA comes in near 2944.

Mexico:  USD/MXN couldn’t sustain a break below 17.50 and has turned higher.  The low for this move was recorded on August 25.  Using the July drop, the final retracement objective comes in near 18.04 (62%).  Break of 18.04 would target the July high near 18.4050.  The 200-day MA comes in near 18.97.

Peru:  USD/PEN couldn’t sustain a break below 3.2300 and has turned higher.  The low for this move was recorded on September 11.  USD/PEN is already above the August high.  Using the May-September drop, the next retracement objectives come in near 3.2635 (50%) and 3.2720 (62%).  Break of 3.2720 would target the May high near 3.30.  The 200-day MA comes in near 3.27. 

EMEA

Czech Republic:  EUR/CZK couldn’t sustain a break below 26 and has turned higher.  The low for this move was recorded on August 3.  Using the April-August drop, the major retracement objectives come in near 26.34 (38%), 26.48 (50%), and 26.61 (62%).  Break of 26.61 would target the April 27 high near 27.06.  The 200-day MA comes in near 26.58.

Hungary:  EUR/HUF couldn’t sustain a break below 302 and has turned higher.  The low for this move was recorded on August 24.  The pair is on track to test the April high near 314 and then the December higher near 315.50.  The 200-day MA comes in near 308.50.

Poland:  EUR/PLN couldn’t break below 4.15 and has turned higher.  The low for this move was recorded on July 18.  Using the January-May drop, the next major retracement objectives come in near 4.2970 (50%) and 4.33 (62%).  Break of 4.33 would target the January high near 4.4345.  The 200-day MA comes in near 4.27.

Israel:  USD/ILS couldn’t sustain a break below 3.50 and has turned higher.  The low for this move was recorded on September 22.  Using the August-September drop, the major retracement objectives come in near 3.5415 (38%), 3.56 (50%), and 3.5770 (62%).  Break of 3.5770 would target the August 21 high near 3.6350.  The 200-day MA comes in near 3.6365.

Russia:  USD/RUB couldn’t sustain a break below 57 and has turned higher.  The low for this move was recorded on September 7.  Using the August-September drop, the major retracement objectives come in near 58.34 (38%), 58.82 (50%), and 59.30 (62%).  Break of 59.30 would target the August higher near 60.85.  The 200-day MA comes in near 58.41.

South Africa:  USD/ZAR couldn’t sustain a break below 12.80 and has turned higher.  The low for this move was recorded on September 6.  The pair is on track to test the August 9 high near 13.54, as well as the July 11 high near 13.63 and the May 5 high near 13.71.  Break of the 13.4245 area would set up a test of the April 10 high near 13.96.  The 200-day MA comes in near 13.23.

Turkey:  USD/TRY couldn’t sustain a break below 3.40 and has turned higher.  The low for this move was recorded on September 11.  Break of the 3.5485 area would set up a test of the July 7 high near 3.6470.  The 200-day MA comes in near 3.5925.  

Asia

China:  USD/CNY couldn’t sustain a break below 6.45 and has turned higher.  The low for this move was recorded on September 8.  Using the June-September drop, the next major retracement objectives come in near 6.6415 (50%) and 6.69 (62%).  Break of 6.69 would target the June 27 high near 6.8440.  The 200-day MA comes in near 6.8165.

Hong Kong:  The USD/HKD peg at 7.80 will remain in place for the foreseeable future, as will the 7.75-7.85 trading band.  In August, the pair traded at its highest level since January 2016.  The high that month came in near 7.83.  The pair has since drifted lower to trade around 7.81.

India:  USD/INR couldn’t break below 63.50 and has turned higher.  The low for this move was recorded on August 3.  Using the January-August drop, the next major retracement objectives come in near 66.00 (50%) and 66.55 (62%).  Break of 66.55 would target the January high near 68.40.  The 200-day MA comes in near 65.52.

Indonesia:  USD/IDR couldn’t sustain a break below 13150 and has turned higher.  The low for this move was recorded on September 11.  The pair is on track to test the July 7 high near 13421 and then the January high near 13500.  The 200-day MA comes in near 13333.

Korea:  USD/KRW couldn’t sustain a break below 1120 and has turned higher.  The low for this cycle was recorded on July 27.  Using the July drop, the last major retracement objective comes in near 1140 (62%).  Break of 1140 would target the July 7 high near 1158.  The 200-day MA comes in near 1141.

Malaysia:  USD/MYR couldn’t sustain a break below 4.20 and has turned higher.  The low for this cycle was recorded on September 8.  Using the August-September drop, the major retracement objectives come in near 4.2270 (38%), 4.24 (50%), and 4.2545 (62%).  Break of 4.2545 would target the July high near 4.30.  The 200-day MA comes in near 4.36.

Philippines:  USD/PHP couldn’t sustain a break below 49.50 and has turned higher.  The low for this cycle was recorded on September 25.  Using the August-September drop, the next major retracement objectives come in near 51.06 (50%) and 51.20 (62%).  Break of 51.20 would target the August high near 51.61.  The 200-day MA comes in near 50.21.

Singapore:  USD/SGD couldn’t sustain a break below 1.3350 and has turned higher.  The low for this move was recorded on September 8.  Using the August-September drop, the last major retracement objective comes in near 1.3560 (62%).  Break of 1.3560 would target the August high near 1.37.  The 200-day MA comes in near 1.3925.

Taiwan:  USD/TWD couldn’t sustain a break below 30 and has turned higher.  The low for this move was recorded on September 8.  The pair is on track to test the August high near 30.42.  Using the July-September drop, the next major retracement objectives come in near 30.27 (50%) and 30.36 (62%).  Break of 30.36 would target the July high near 30.64.  The 200-day MA comes in near 30.61.

Thailand:  USD/THB couldn’t break below 33.00 and has turned higher.  The low for this move was recorded on September 7.  Using the August-September drop, the next major retracement objectives come in near 33.21 (50%), and 33.25 (62%).  Break of 33.25 would target the August high near 33.38.  The 200-day MA comes in near 34.34.