EM FX: Is the worst over? - Rabobank

The CEEMEA currencies continue to exhibit an impressive composure at the time when global stocks are making an attempt to stabilise following the biggest sell-off so far this year, according to Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“Given that market participants are pondering whether the rebound in US stocks from the recent lows marks the end of the rout, it is worth assessing the price action in the S&P 500 Index from the perspective of technical analysis and consider potential implications for risky assets.”

“While President Donald Trump can breathe a sigh of relief that the upside trend in US stocks remains intact, it is too early to declare that Tuesday’s rebound shifted the short-term bias back in favour of the bulls.”

“The initial resistance in the S&P 500 Index comes at around the 2695 level. A close above this threshold at the end of today’s session would be an encouraging signal. However, given the scale of the sell-off, it would be prudent to assume that until the S&P 500 Index rallies beyond the 61.8% Fibonacci retracement at 2765.99 or above the 76.4% at 2806.84 to provide a higher conviction, another leg lower may still unfold in the coming days.”

“After all, the substantial fall at least to some extent must have undermined confidence amongst the bulls and those with weaker hands might be looking for the opportunity to sell on rallies to get out.”

“Should the selling pressure resumes and the trendline support at 2614.45 is broken, the 38.2% Fibonacci retracement (of the Trump’s rally) would be the next important level to monitor at 2571.44. Below that, the area at 2510/2484 would provide support.”

“The CEEMEA currencies have been coping tremendously well with the rout in global stocks. However, another leg lower in the S&P 500 Index would increase the risk of capital outflows from EM stocks and would weigh on the CEEMEAs. The Turkish lira and the South African rand would be the most vulnerable to such a negative scenario due to their reliance on portfolio inflows to finance current account deficits.”

“To summarise, there are signs of stabilisation in the markets and the CEEMEAs continue to hold well. But, yesterday’s rebound in the S&P 500 Index hasn’t produced a convincing signal from the perspective of technical analysis to declare with a high level of confidence that the worst is over.”