Emerging Market FX and Equities--Where do We Stand?

(from Dr. Win Thin)

We think it would be a good idea to take a step back to see how EM FX and equities have performed during this recent bounce. Many EM currencies peaked against the dollar and the euro in early May, but then gave up ground, especially after Bernanke’s tapering talk starting May 22. EM FX then bottomed in late June/early July, and so we will look at retracement objectives from this EM sell-off.

The takeaway is that for most EM currencies, we appear to be in the midst of a shallow corrective bounce from the May-June sell-off. We think the bounce can be extended, but we believe EM will find it hard to gain medium-term traction until the Fed tapering story is much clearer. For now, it remains muddy and so we expect further volatility ahead for EM FX. Whatever the case, it’s best to be selective and stick with the names with stronger fundamentals, especially external accounts.

On the equity side, EM has behaved differently than DM this year. Most EM equity markets peaked in January and fell steadily through much of H1 before bouncing a bit as H2 gets under way. In this piece, we will focus on the EM equity moves that took place in May, June, and July in an effort to capture the tapering-related moves that we are comparing in EM FX. Most of EM equity markets continue to lag the S&P, which has fully retraced the down move from the May 22 peak and is making new highs.

Notable outperformers: Colombia, Mexico, Israel, Poland

Notable underperformers: Brazil, Peru, Czech Republic, Turkey

Latin America 

Brazil: USD/BRL has only retraced about a quarter of the move, and has yet to test the 38% objective near 2.17. The 50% and 62% objectives are near 2.1375 and 2.1040, respectively. The May 9 low was 1.9950. The Bovespa has barely retraced a quarter of the move down and has yet to test the 38% objective near 49070. The May 22 high was 57099.

Chile: USD/CLP has retraced over a third of the move, and is near the 38% objective around 499. The 50% and 62% objectives are 493 and 487, respectively. The May 3 low was 469. The IPSA has retraced a quarter of the move down and is on its way to testing the 38% objective near 3961. The May 8 high was 4367. 

Colombia: USD/COP has retraced about half of the move, trading near the 50% objective around 1886 after it tested but failed to break the 62% objective near 1871. Break below the 62% would target the May 7 low near 1822. The COLCAP has retraced nearly three quarters of the move down after breaking the 62% objective near 1658. This targets the May 28 high near 1725. 

Mexico: USD/MXN has retraced nearly two thirds of the move, breaking below the 62% objective near 12.52. This targets a retest of the May 9 low near 11.94. The Bolsa has retraced over half of the move down and is on track to test the 62% objective near 40629. Break above would set up a test of the May 3 high near 42852. 

Peru: USD/PEN has only retraced about a quarter of the move, and has yet to test the 38% objective near 2.7230. The 50% and 62% objectives are near 2.700 and 2.6750, respectively. The May 14 low was 2.60. The Lima General Index has only retraced about a quarter of the move down and has yet to test the 38% objective near 15923. The May 14 high was 18009.

EMEA

Czech Republic: EUR/CZK has not really traded with the rest of EM in recent months. Instead, the pair has been trading largely sideways in a 25.40-26.20 range since February, and is currently near the top of that range despite the recovery elsewhere in EM. The Prague Index has retraced only about a quarter of the move down and is testing the 38% objective near 902. The May 22 high was 993. 

Hungary: EUR/HUF trading has been slightly different from the rest of EM too. Instead of early May, the pair bottomed on May 28 and then spiked to 301 in mid-June. EUR/HUF had retraced two thirds of the move but failed to break below the 62% objective near 291.65. The pair is now trading back near the 38% level around 295. The BUX has traded a bit differently than much of EM too, peaking June 10 and then bottoming June 24. It had retraced almost all of that move by mid-July, but has since given up much of those gains and is trading near the 38% level around 18893. The June 24 low was 18282.

Poland: EUR/PLN has retraced about half the move, and is testing the 50% objective near 4.2450. The 62% objective is near 4.2160, and break below that would target a retest of the May 9 low near 4.1200. The WIG-20 has traded a bit differently than much of EM too, peaking June 10 and then bottoming June 27. It has retraced over a third of that move down, trading near the 38% objective around 2290. The 50% comes in near 2332 and the June 10 high was 2513. 

Israel: USD/ILS has retraced about three quarters of the move, and is close to the May 9 low near 3.54. The Israeli central bank intervened this week in an effort to support this pair. The TA-25 has retraced nearly three quarters of the May-July drop, breaking above the 62% objective near 1220 and on its way to testing the May 28 high near 1243.

Russia: USD/RUB has retraced over a third of the move, breaking below the 38% objective near 32.45. The 50% and 62% objectives are 32.16 and 31.88, respectively. The May 3 low was 30.95. The MICEX has retraced about three quarters of the down move, trading just below the May 22 high of 1454. 

Turkey: USD/TRY has retraced a little over a quarter of the move, and has yet to break the 38% objective near 1.9030. The 50% and 62% objectives are near 1.88 and 1.8590, respectively. The May 8 low was 1.7875. The ISE-100 has only retraced about a quarter of the move down and has yet to test the 38% objective near 78996. The May 22 high was 93398. 

South Africa: USD/ZAR has retraced a little over a third of the move, and is testing the 38% objective near 9.8085. The 50% and 62% objectives are 9.6350 and 9.4620, respectively. The May 3 low was 8.90. The JSE All Share index has retraced almost three quarters of the move down, breaking the 62% objective near 40539 and on track to test the May 31 high near 42208.

Asia

India: USD/INR has only retraced about a quarter of the move, and has yet to test the 38% objective near 58.33. The 50% and 62% objectives are near 57.44 and 56.55, respectively. The May 2 low was 53.67. The SENSEX, however, has retraced over three quarters of the move down, breaking the 62% objective near 19689 and on track to test the May 20 high near 20444.

Indonesia: USD/IDR has not really traded with the rest of EM in recent months. Instead, the pair has been generally drifting upwards within a 9800-10200 range since late May. It is currently near the top of that range despite the recovery elsewhere in EM. The JCI has retraced over third of that move down, trading just above the 38% objective around 4709. The 50% comes in near 4812, while the May 21 high was 5251. 

Korea: USD/KRW has retraced about half of the move, testing but failing to break the 62% objective near 1113. It is currently trading just above the 50% level of 1122. Break below 1113 would target the May 9 low near 1082. The KOSPI has retraced over third of that move down, trading near the 38% objective around 1863. The 50% comes in near 1892, while the May 31 high was 2013. 

Malaysia: USD/MYR has hardly retraced any of the move, and is trading just below the May 7 high near 3.22. The 38% objective comes in near 3.12, while the 50% and 62% objectives are near 3.09 and 3.06, respectively. The May 7 low was 2.96. However, the KLCI has retraced over two thirds of the down move, and just broke above the 62% objective near 1787. This puts it on track to test the May 6 high near 1826.

Philippines: USD/PHP has only retraced about a quarter of the move, and has yet to test the 38% objective near 42.87. The 50% and 62% objectives are near 42.46 and 42.05, respectively. The May 9 low was 40.74. The Philippines Composite has retraced over half the down move and is nearing the 62% objective near 6745. Break would target the May 15 high near 7404.

Singapore: USD/SGD has retraced less than a third of the move, and fell short of breaking the 50% objective near 1.2565. The 62% objective is 1.2500 and the May 8 low was 1.2270. The STI has retraced about a third of that move down, trading near the 38% objective around 3218. The 50% comes in near 3265, while the May 22 high was 3465.

Thailand: USD/THB has only retraced about a quarter of the move, and has yet to test the 38% objective near 30.60. The 50% and 62% objectives are near 30.30 and 30.00, respectively. The May 1 low was near 29.00. The SET has nearly retraced half the down move, nearing the 50% objective near 1494. The 62% level is near 1531 and the May 21 high was 1650.

Taiwan: USD/TWD has retraced less than a third of the move after testing but failing to break the 50% objective near 29.78. The 62% objective is 29.68 and the May 9 low was 29.34. The TWSE has retraced over two thirds of the down move, breaking above the 62% objective near 8143. The May 22 high was near 8439.