EM FX and Equities - Where Do We Stand Now?

(from my colleagues Dr. Win Thin and Ilan Solot)

We think it would be a good idea to again take a step back to see how EM FX and equities have performed after the recent chaotic price action. After selling off after Bernanke’s tapering talk starting May 22, EM FX then bottomed in late June/early July before staging a modest corrective recovery as July wore on. Most EM currencies topped out in mid- to late July and have since weakened through August. We look at retracement objectives from that July corrective rally in EM. Since most EM currencies have fully retraced those moves, we go back and reference earlier moves, with many dating back to 2010 and 2011.

The shallow corrective recovery from the May-June sell-off has clearly ended and that the dollar is poised to continue making new highs against EM. We have long believed that EM would 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 countries that have stronger fundamentals, especially regarding external accounts.

On the equity side, equities (as measured by MSCI EM) bottomed on June 25, rallied to a high near 972 on July 24 before easing back. It has retraced nearly three quarters of that corrective rally, breaking the 62% retracement objective near 914 that now targets the June 25 low near 878.

Latin America

Brazil: USD/BRL has fully retraced the corrective drop, and made a new multi-year high near 2.4550 last week. Break of last week’s high (also near the 2009 high that’s around 2.45) would target the December 2008 high near 2.62. The Bovespa bottomed on July 5, rallying to near 52400 this week before turning lower. It has retraced nearly a third of that move higher, and is set up to test the 38% objective near 49231. The 50% and 62% objectives are near 48253 and 47274, respectively.

Chile: USD/CLP fully retraced the corrective drop earlier this month, making a new cycle high near 520 in mid-August. It has since fallen back a bit, but is now back on track to test the 2012 high near 523 and then 2011 highs near 530 and 535. The IPSA continues to make new multi-year lows, and has fully now retraced the 2011-2012 rally. Break of the October 2011 low near 3600 targets the November 2009 low near 3168. That lies near 3175, which is the 62% objective of the big 2008-2011 rally. Break would target the October 2008 low near 2018.

Colombia: USD/COP has almost fully retraced the corrective drop, and is poised to test the June 24 high near 1950. Break would target some 2011 peaks near 1960, 1975, and 1988. After that is the December 2010 high near 2035. The COLCAP bottomed on July 10 and has continued to rally, making new highs for the move earlier this month near 1750 before turning lower. It has retraced about a quarter of that rally, with the 38% objective coming in near 1672 as the next level to look for.

Mexico: USD/MXN has almost fully retraced the corrective drop, and is on track to test the June 20 high near 13.46. Break above would target July 2012 high near 13.78. The 62% retracement objective from the 2012-2013 drop in USD/MXN comes in near 13.58, so break would target the June 2012 high near 14.60. The Bolsa bottomed June 24, then rallied to a high on August 12 near 42782 before falling back. The 62% retracement objective from the June-August rally in the Bolsa comes in near 39230. Break would target the June 24 low near 37035.

Peru: USD/PEN has retraced the entire corrective drop, breaking the July 2 high near 2.80 and making new multi-year highs. The 2011 high near 2.84 lies ahead, followed by the December 2009 high near 2.90. The 2.90 area also represents the 50% objective of the big 2009-2013 drop, break of which would target the 62% just below 3.00. The Lima General Index bottomed near 14634 on July 10, recovering in late July into August to its highest level since mid-June. It fell short of testing the May high near 18000, as 17000 proved to be stiff resistance. It has since fallen back to near 16500, giving up nearly a quarter of that rally.

EMEA

Czech: 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 bottom of that range. The Prague Index bottomed June 24, rallying to test the May high near 993 before running out of steam around 985. Retracement objectives from this rally come in near 932, 915.50, and 899.

Hungary: EUR/HUF has fully retraced the corrective drop, and is making new highs for this move near 303. Some minor resistance seen near 305, but break above 300 points to a retest of the March high near 309. Break above a major retracement level near 305 would target the January 2012 high near 325. The BUX is making new lows for this move below 18000 and is threatening the year’s low near 17700. Below that is the November 2012 low near 17500, which also coincides with a key retracement objective dating back to 2012. Break below this area would set up a test of the May 2012 low near 16000.

Poland: EUR/PLN has retraced nearly two thirds of the corrective drop, and is testing the 62% objective near 4.2940. Break above that would target the June 21 high near 4.3700. After that is the June 2012 high near 4.43 and then the December 2011 high near 4.60. The WIG-20 bottomed June 27, rallying into August before falling back. It has given up about a third of that move, testing the 38% retracement objective near 2352. The 50% and 62% objectives come in near 2313 and 2275, respectively.

Israel: USD/ILS has almost fully retraced the corrective drop, and is about to test the July 8 high near 3.6775. The May 28 high near 3.72 lies ahead. Break of the retracement objective near 3.70 would target the January high near 3.80. The TA-25 is making new lows for the year below 1150. After that, the break of a retracement objective near 1120 would target the June 2012 low near 1037. After that is the November 2011 low just below 1000.

Russia: USD/RUB has almost fully retraced the corrective drop and is about to test the July 5 high near 33.37. After that, June 2012 highs near 33.62 and then 34.15 lie ahead. Break above the 34.34 area would target the February 2009 high near 36.56. The MICEX bottomed on June 12 and then rallied to 1440 on July 18. It has retraced over a third of this up move, trading just below the 38% retracement level near 1375. The 50% is near 1356 and the 62% objective is 1336.

South Africa: USD/ZAR has retraced all of the corrective drop and is making new multi-year highs near 10.51. The March 2009 high near 10.73 lies ahead, followed by the October 2008 high near 11.8725. The JSE All Share index bottomed on June 25 and rallied to make new all-time highs above 43000 before running out of steam. It has not yet retraced a quarter of that rally, and the 385 objective comes in near 41245.

Turkey: USD/TRY has retraced all of the corrective drop, and is currently making new al-time highs near 2.07. We are in uncharted territory and will have to rely on round number targets like 2.10 and such. The ISE-100 is making new lows for the year below 64500. The low from July 2012 lies ahead near 60500, but the break of the 65700 retracement objective points to a test of the August 2011 low near 48600. Interim target is the May 2012 low near 54000.

Asia

Indonesia: USD/IDR weakness has intensified in recent days, making highs not seen since 2009. The 62% retracement objective from the big 2008-2011 drop comes in near 11265, and break of that now targets the November 2008 high near 13000. Ahead of that is the March 2009 high near 12160. The JCI is making new lows for the year. The June 2012 low near 3635 lies ahead. Break of the 3995 level targets the 2011 low near 3218. After that is the May 2010 low near 2500.

India: USD/INR weakness has also intensified in recent weeks, making all-time highs near 69 despite the introduction of many measures meant to support the rupee. Here too we resort to round number targets like 70 and so on. The SENSEX is making new lows for the year near 17500. Break below 17542 targets the June 2012 low near 15750 and then the December 2011 low near 15135.

Korea: USD/KRW peaked June 25 near 1163 and fell to 1108 on August 9. It has retraced less than a quarter of the corrective drop, and has yet to test the 38% objective near 1129. The 50% and 62% levels stand at 1135 and 1142, respectively. The KOSPI bottomed on June 25 and then rallied to peak near 1939 on August 2. It has since retraced about a third of that move down, trading near the 38% objective around 1875. The 50% and 62% objectives come in near 1855 and 1835, respectively, while the June 25 low was near 1770.

Malaysia: USD/MYR has fully retraced the corrective drop and is making new highs for the year near 3.35. The 50% retracement objective from the big 2009-2011 drop in USD/MYR comes in near 3.3355, followed by the 62% near 3.43. Break above 3.43 targets the March 2009 high near 3.7365. Near-term, the May 2010 high near 3.3655 lies ahead, and then the February 2010 high near 3.4545. The KLCI is making new lows for this move near 1650. Break below the 1685 level targets the 2013 low near 1600. After that is the May 2012 low near 1527.

Philippines: USD/PHP has retraced the entire corrective drop and is making new multi-year highs near 45.00. The 2011 high near 44.71 was just broken. Break of the 44.61 area targets a test of the May 2010 high near 47.13. The Philippines Composite bottomed on June 25 and then rallied to peak near 6830 on July 25. It has since fully retraced this rally, breaking below the June low near 5680. That break targets the May 2012 low near 4865. Looking further out, 5560 and 5124 are retracement objectives from the big 201102103 rally, break of 5124 would target the September 2011 low near 3715.

Singapore: USD/SGD has fully retraced its corrective drop, and made a marginal new high for the year near 1.2860 last week. The June 2012 high near 1.2970 and the January 2012 high near 1.3000 offer a band of resistance, but break above that would target the October 2011 high near 1.3200. The STI is making new lows for the year just above 3000. Break below targets the November 2012 low near 2930 and then the May 2012 low near 2700.

Taiwan: USD/TWD peaked on June 24 and then fell to 29.78 on July 17. It has since retraced about half of the move, trading abound the 50% retracement objective near 30. The 62% objective comes in near 30.055, and break would target the June 24 high near 30.23. The TWSE bottomed June 25 and then recovered to peak near 8266 on July 18. It has since retraced nearly three quarters of that rally, and is close to testing the June 25 low near 7663. The January low near 7600 lies just ahead, but a break of a retracement objective near 7588 would target the late November 2012 low near 7062.

Thailand: USD/THB has fully retraced its corrective rally, and is making new multi-year highs near 32.30 The June 2010 high near 32.70 and the January 2010 high near 33.55 lie ahead. Note that 33.45 represents a major retracement objective from the 2009-2013 drop, so break would target the March 2009 high near 36.45. The SET is making new lows for the year below 1300 this week. There are some minor support levels in between, but the break of the 1310 retracement objective targets the June 2012 low near 1100. Below that is 1000 and then the 2011 low near 845.