Emerging Markets Pairs may be Giving Us Clues

Emerging market currencies may be telling us that stocks have moved too far, too fast!

FOREX 3

Many emerging market currencies (EMs) trade in the same direction as stocks.  That is, many of the emerging market currency US Dollar pairs trade inversely with stocks.  So, if stocks move lower, emerging market US Dollar pairs, such as the USD/MXN, USD/ZAR and USD/TRY will trade higher.  With stocks bouncing off the lows over the last month, one would  guess that these EM pairs have retraced their moves as well.  However, that is not the case.  Is there information in that?

As we have seen, the S&P 500 has traded to a low of 2174.25 on March 23rd and have been trading higher since.  On Friday, the Index put in a recent high of 2885, near the 61.8% Fibonacci retracement level from the all-time highs on February 20th highs to the March 23rd lows. 

Source:  Tradingview, CME, FOREX.com

However, if we take a look at an EM pair, such as USD/MNX, the pair has only traded back to the 38.2% Fibonacci retracement level from the highs on March 24th.  The pair has been consolidating sideways in a pennant formation since then. If it does break higher, the current target is above 30.00!

Source:  Tradingview, FOREX.com

Over the same February 20th to March 23rd time period, USD/ZAR only stalled for a few days before continuing its bid higher.  The pair finally stopped at all-time highs of 19.339 on April 6th and has also been consolidating in a sideways more.  The EM pair couldn’t even pull back to the 38.2% Fibonacci retracement level from that time frame, much less from the lows at the beginning of the move on January 2nd!

 Source:  Tradingview, FOREX.com

USD/TRY has been non-stop bid since the beginning of the move higher in stocks, with minor pullbacks along the way.   Although the pair is diverging with the RSI and probably due for a pullback, it hasn’t yet.  USD/TRY is trading near recent highs at 6.9500.

Source:  Tradingview, FOREX.com

So, what does all this mean for stocks?  If we take a look at these EMs, we can see that they have only pulled back slightly, or not at all!  They may even break out soon and head higher!  If that happens, one would think that stocks may move lower.  Emerging market currencies may be telling us that stocks have moved too far, too fast!


More from EM

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.