CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Open account
☰
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Open account
✖

Emerging Markets Pairs may be Giving Us Clues

April 20, 2020 12:31 PM

Emerging Markets Pairs may be Giving Us Clues

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, City Index

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, City Index

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, City Index

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, City Index

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!


StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website 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.

© City Index 2024