EM FX Technical Picture

The EM washout continues. The Turkish lira is grabbing all the attention, but the global backdrop is negative for all of EM. This backdrop of higher US rates, heightened trade tensions, and slowing growth in China is expected to persist well into 2019.

We saw some significant policy moves yesterday by EM officials. While these moves could inject some temporary stability, the underlying bear trend for EM remains in place. Argentina’s central bank hiked rates 15 percentage points to 60% and pledged not to cut until December. It also sold $330 mln to help support the peso, and yet it still ended down 12% on the day though off its worst levels near 41.36.

Elsewhere, Brazil central bank BCB offered three separate auctions of new FX swaps totaling $1.5 bln. This was the first new auction since June 22 and should be viewed as a very aggressive move. Yet we have seen nothing from Turkish policymakers beyond several minor tweaks. We do think Turkey’s hand will eventually be forced by the markets, but we’re not there yet in terms of pain thresholds.

MSCI EM rallied for much of 2017, with the last leg up from early December until late January. It peaked at 1279 on January 29. Since then, it retraced that entire leg and traded at the lowest level since July 2017 on August 16. The bounce since has been shallow and MSCI EM is on track to test that August low near 1014. A break below would set up a test of the June 2017 low near 1000. Looking further out, a break of the 1008 area would set up a test of the December 2016 low near 840.

Similarly, MSCI EM FX rallied for much of 2017, with the last leg up from early December until late March. It peaked at 1732 on March 27. Since then, it has retraced that entire leg and traded at its lowest level since last May on August 15. MSCI EM FX is on track to test the March 2017 low near 1546 and then the mid-December 2016 low near 1500. The November 2016 low near 1492 lies nearby.

Every EM currency is down in 2018 except for MXN. The worst performers are the high beta group ARS, TRY, BRL, ZAR, and RUB. With US rates likely to march higher and trade tensions still ratcheting up, we believe EM FX is likely to remain under pressure in H2. We simply don’t get the sense that anyone wants to step in front of this freight train now.

Given this outlook, we look at some retracement objectives for individual EM currencies. In most cases, significant technical damage has been inflicted. The members of the new Fragile Five (ARS, TRY, BRL, ZAR, and RUB) are trading at multi-year lows. Elsewhere, the stronger credits (especially in Asia) have held up better but are still revisiting the lows from Q4.

 

Latin America

Argentina: USD/ARS traded at an all-time high near 41.36 yesterday. The pair has fallen back slightly after the aggressive 15 percentage point hike and some accompanying FX intervention, but we expect new highs to be established in the coming weeks. The 200-day MA comes in near 22.4585.

Brazil: USD/BRL traded at its highest level since January 2016 near 4.2135 yesterday. The pair is on track to test the September 2015 high near 4.2480. There is an upward sloping channel on the weekly chart dating back to 2007. The top of that channel comes in near 4.95 currently. The 200-day MA comes in near 3.5070.

Chile: USD/CLP traded at its highest level since June 2016 near 683 today. The next target is the May 2016 high near 700, but the break of the 677 area sets up a test of the January 2016 high near 733. The 200-day MA comes in near 625.

Colombia: USD/COP traded at its highest level since November 2017 near 3063 on August 15. A break of that August high near 3063 would set up a test of the November 2017 high near 3080 and then the July 2017 high near 3103. Looking further out, a test of the November 2016 high near 3208 is likely. The 200-day MA comes in near 2887.

Mexico: USD/MXN has retraced nearly a third of the June-August drop. Major retracement objectives of that drop come in near 19.3810 (38%), 19.6830 (50%) and 19.9845 (62%). The 200-day MA comes in near 19.04.

Peru: USD/PEN traded at its highest level since January 2017 near 3.3290 on August 15. Break above the 3.3510 area would set up a test of the November 2016 high near 3.4450. The 200-day MA comes in near 3.2555.

 

EMEA

Czech Republic: EUR/CZK traded at its highest level since August 2017 near 26.178 on July 3. Break of the 26.437 area would set up a test of the March 2017 high near 27.25. The 200-day MA comes in near 25.578.

Hungary: EUR/HUF traded at its highest level ever near 331 on July 2. The pair is trading in an upward sloping channel on the daily chart going back to mid-2013. The top of that channel comes in near 337 currently. The 200-day MA comes in near 316.

Poland: EUR/PLN traded at its highest level since January 2017 near 4.4140 on July 2. Break of that July high would set up a test of the December 2016 high near 4.5065 and then the June 2016 high near 4.54. The 200-day MA comes in near 4.2370.

Israel: USD/ILS traded at its highest level since April 2017 near 3.7255 on August 10. Break of that August high would target the November 2016 high near 3.8860. The 200-day MA comes in near 3.5475.

Russia: USD/RUB traded at its highest level since April 2016 near 69.3575 on August 13. Break of the 71.05 area is needed to set up a test of the February 2016 high near 80.63. The 200-day MA comes in near 60.5225.

South Africa: USD/ZAR traded at its highest level since June 2016 near 15.55 on August 13. Break of that August high would set up a test of the January 2016 high near 17.9170. Intermediate targets are the June 2016 high near 15.6820 and then the May 2016 high near 15.9825. The 200-day MA comes in near 12.75.

Turkey: USD/TRY traded at its highest level ever near 7.2360 on August 13. The is on track to test that August high and is likely to move even higher. The 200-day MA comes in near 4.3515.

 

Asia

China: USD/CNY traded at its highest level since January 2017 near 6.9375 on August 13. The break of that August high would set up a test of the December 2016 high near 6.9650. Using the big 2005-2014 drop in USD/CNY after the peg was eliminated, the major retracement objectives come in near 6.8940 (38%), 7.1580 (50%), and 7.4220 (62%). The 200-day MA comes in near 6.5045.

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. The pair has been bumping up against the top of that band off and on for most of this year. It remains near 7.85 and the HKMA will continue intervening as needed to protect the band.

India: USD/INR traded at its highest level ever near 71 today. The pair is trading in an upward sloping channel on the monthly chart going back to 1988. The top of that channel comes in near 75.60 currently. The 200-day MA comes in near 66.2335.

Indonesia: USD/IDR traded at its highest level since October 2015 near 14710 today. The pair is on track to test that 2015 high near 14828 and then the January 1998 high near 16000. The all-time high from June 1998 comes in near 16950. The 200-day MA comes in near 13864.

Korea: USD/KRW traded at its highest level since October 2017 near 1139 on July 20. Break of that July high would set up a test of the October 2017 high near 1150 and then the July 2017 high near 1158. The 200-day MA comes in near 1087.

Malaysia: USD/MYR traded at its highest level since November 2017 near 4.1120 yesterday.  The pair is on track to test the October 2017 high near 4.2440. Break of the 4.1320 area would set up a test of the July 2017 high near 4.3045. The 200-day MA comes in near 4.00.

Philippines: USD/PHP traded at its highest level since June 2006 near 53.639 on July 19. The pair is on track to test the all-time high from February 2004 near 56.50. The 200-day MA comes in near 52.09.

Singapore: USD/SGD traded at its highest level since July 2017 near 1.3820 on August 13. Break of 1.3960 would set up a test of the January 2017 high near 1.4545. Intermediate targets include the May 2017 high near 1.4130 and then the March 2017 high near 1.4220. The 200-day MA comes in near 1.3380.

Taiwan: USD/TWD traded at its highest level since March 2017 near 30.876 on August 15. Break of 31.1140 is needed to set up a test of the January 2017 high near 32.447. The 200-day MA comes in near 29.840.

Thailand: USD/THB traded at its highest level since October 2017 near 33.526 on July 20.   Break of that October 2017 high near 33.545 would set up a test of the July 2017 high near 34.208. After that is the May 2017 high near 34.83. The 200-day MA comes in near 32.17.