In light of the Fed’s dovish tilt in March, the global liquidity outlook turned further in favor of EM. As a result, EM extended the bounce off the January/February lows. There's no clear narrative as to why EM is softer this week, but it just seems to be a much-needed correction and positioning flush-out.
Bottom line: a dovish Fed (for now) should limit this sell-off, and the EM rally could resume for a while longer before turbulence returns later this year. We expect many EM currencies to retrace nearly half of this year’s rally before the current sell-off ends. With this in mind, we identify possible retracement objectives from the EM rally that started in Q1. Some currencies bottomed in January, others in February.
Regarding the EM sell-off that started last year, many currencies have already recouped their losses from December. As such, we will go back to look at the broader EM moves that started in October/November. For some, we will need to go back even further to around mid-2015.
Note that MSCI EM fell 21% from November 4 to January 21. It then rallied 25% to challenge the November highs, but it has since fallen back. MSCI EM has now retraced about a quarter of this year's rally. Major retracement objectives come in near 791 (38%), 771 (50%), and 751 (62%).
Latin America
Brazil: USD/BRL retraced the entire August-January rise before this week’s correction. A break below the April 29 low near 3.43 would set up a test of the mid-July low near 3.1150. The 200-day MA comes in near 3.77. Retracement objectives from the January-April drop come in near 3.713, 3.80, and 3.888.
Chile: USD/CLP retraced the entire July-January rise before this week’s correction. A break below the April 21 low near 655 would set up a test of the mid-July low near 641 and then the July 3 low near 635. The 200-day MA comes in near 693. Retracement objectives from the January-April drop come in near 685, 694, and 703.
Colombia: USD/COP retraced nearly the entire November-February rise before this week’s correction. A break below the November 4 low near 2785 would set up a test of the June 10 low near 2508. The 200-day MA comes in near 3107. Retracement objectives from the February-May drop come in near 3060, 3135, and 3210.
Mexico: USD/MXN retraced nearly the entire December-February rise before this week’s correction. A break below the 17 area would set up a test of the December 1 low near 16.47. After that is the October 15 low near 16.33. The 200-day MA comes in near 17.25. Retracement objectives from the February-April drop come in near 17.965, 18.25, and 18.53.
Peru: USD/PEN retraced nearly the entire October-February rise before this week’s correction. A break of the April low near 3.24 would set up a test of the October 5 low near 3.21 and then the mid-September low near 3.18. The 200-day MA comes in near 3.34. Retracement objectives from the February-April drop come in near 3.3540, 3.39, and 3.4265.
EMEA
Czech Republic: EUR/CZK has not really traded with the rest of EM ever since the CNB instituted the floor “near” 27 back in November 2013. The pair has pretty much traded just above 27 since early November. We see the floor remaining in place until mid-2017, as the central bank just extended its forward guidance. The 200-day MA comes in near 27.05.
Hungary: EUR/HUF retraced nearly the entire entire October-January rise back in February. It has since drifted higher. A break below the August 3 low near 307 would set up a test of the mid-April low near 296. The 200-day MA comes in near 312. Retracement objectives from the January-February drop come in near 313 and 314.44.
Poland: EUR/PLN retraced nearly the entire entire November-January rise back in April. It has since drifted higher. A break of the November 11 low near 4.2075 would set up a test of the September 21 low near 4.18. The 200-day MA comes in near 4.29. Final retracement objective from the January-April drop comes in near 4.40.
Israel: USD/ILS retraced the entire June-January rise before this week’s correction. A break of the May low near 3.73 would take it to new lows since 2014. Retracement levels from the 2014-2015 rise come in near 3.7345 (50%) and then 3.6555 (62%). The 200-day MA comes in near 3.87. Retracement objectives from the January-May drop come in near 3.83, 3.86, and 3.89.
Russia: USD/RUB retraced the entire November-January rise before this week’s correction. A break below the November 20 low near 64.34 and then the November 3 low near 62.34 would set up a test of the October 16 low near 60.59. The 200-day MA comes in near 68.80. Retracement objectives from the January-April drop come in near 72.40, 75.00, and 77.60.
South Africa: USD/ZAR retraced the entire December-January rise before this week’s correction. A break below the December 3 low near 14.25 and then the November 2 low near 13.72 would set up a test of October 19 low near 13. The 200-day MA comes in near 14.58. Retracement objectives from the January-April drop come in near 15.57, 16.02, and 16.47.
Turkey: USD/TRY retraced the entire November-January rise before this week’s correction. Break below the November 2 low near 2.7580 would set up a test of the July 14 low near 2.63. The 200-day MA comes in near 2.92. Retracement objectives from the January-May drop come in near 2.8940, 2.9260, and 2.9580.
Asia
China: USD/CNY retraced about half of the November-January rise back in March. It has since drifted higher. Retracement objectives from that move come in near 6.4565 (50%) and 6.4235 (62%). The 200-day MA comes in near 6.4260. Retracement objectives from the January-March drop come in near 6.5075, 6.5245, and 6.5415.
Hong Kong: The USD/HKD peg will remain in place for the foreseeable future. After a brief move to the top half of the 7.75-7.85 trading band, the pair has since returned to the bottom half and is nearing the bottom limit. Improved EM sentiment should keep it trading in the bottom half for now.
India: USD/INR retraced the entire December-February rise back in April. It has since drifted higher. A break below the December 31 low near 66.09 would set up a test of the October 12 low near 64.70. The 200-day MA comes in near 66.14. Retracement objectives from the February-April drop come in near 67.11, 67.43, and 67.75.
Indonesia: USD/IDR retraced the entire October-January rise back in March. It has since drifted higher. A break below the March low near 12984 would set up a test of the April 2015 low near 12810 and then the January 2015 low near 12411. The 200-day MA comes in near 13688. Retracement objectives from the January-March drop come in near 13373, 13493, and 13613.
Korea: USD/KRW retraced nearly the entire October-February rise back in April. It has since drifted higher. A break below the October 19 low near 1121 would set up a test of the June 2015 low near 1100 and then April 2015 low near 1065. The 200-day MA comes in near 1176. Retracement objectives from the February-April drop come in near 1173, 1187, and 1200.
Malaysia: USD/MYR retraced the entire October-January rise and fell to lows not seen since last August. Since April, it has drifted higher. A break below the April low near 3.84 would set up a test of the July 2015 low near 3.73 and then the May 2015 low near 3.56. The 200-day MA comes in near 4.18. Retracement objectives from the January-April drop come in near 4.07, 4.14, and 4.21.
Philippines: USD/PHP retraced nearly the entire October-January rise back in March. It has since drifted higher. A break below the April low near 45.90 would set up a test of the October 2015 low near 45.44 and then the June 2015 low near 44.87. The 200-day MA comes in near 46.85. Final retracement objective from the January-March drop comes in near 47.24.
Singapore: USD/SGD retraced nearly the entire June-January rise back in April. It has since drifted higher. A break below the April low near 1.3350 would set up a test of the June 2015 low near 1.3285 and then the May 2015 low near 1.3165. The 200-day MA comes in near 1.40. Retracement objectives from the January-April drop come in near 1.3770, 1.3900, and 1.4030.
Taiwan: USD/TWD retraced nearly the entire October-January rise before this week’s correction. A break below the October 2015 low near 32 would set up a test of the August 3 low near 31.55 and then the June 19 low near 30.675. The 200-day MA comes in near 32.72. Retracement objectives from the January-April drop come in near 32.77, 33.00, and 33.16.
Thailand: USD/THB retraced the entire October-January rise back in March. It has since drifted higher. A break below the March low near 34.72 would set up a test of the June 2015 low near 33.56. The 200-day MA comes in near 35.65. Retracement objectives from the January-March drop come in near 35.37, 35.57, and 35.77.