No signs of panic in CEEMEAs – Rabobank

Piotr Matys, EM FX Strategist at Rabobank, notes that the CEEMEA currencies continue to hold remarkably very well against the US dollar and the euro despite the ongoing rout in global stocks.

Key Quotes

“This resilience can be attributed to the generally positive outlook for emerging economies where growth is solid and should continue at least for another year as part of the first synchronised recovery in the global economy since the financial crisis. The fact that the US dollar lacks upside momentum is also a source of stability for the CEEMEAs.”

“How long the sell-off in equities may last is likely to prove crucial for the CEEMEAs. If the markets regain composure relatively soon, foreign investors should not significantly reduce their exposure to risky assets. After all, the outlook remains positive, growth is solid and valuations are generally attractive.” 

“That said, a prolonged period of risk aversion could undermine sentiment towards the EMs and trigger substantial capital outflows, which in turn would lead to weaker CEEMEA currencies. For such a negative scenario to unfold the Fed would have to markedly accelerate the pace of tightening and for the US dollar to produce a convincing rebound from recent lows.” 

“Our baseline scenario still assumes only two hikes by the Fed this year in March and in June. Over the past few months we have been arguing that a corrective rebound in the USD vs the CEEMEAs may occur mainly on the back of profit taking following stretched rally. Our conviction has modestly increased after the sharp rise in US Treasury yields provided the battered USD with some support, but it hasn’t proved sufficient to trigger a spike in USD/CEEMEAs that we have been waiting for.” 

“One could argue that it is easy to say that with a hindsight, but a correction in EM stocks seemed inevitably based on the price action over the past few months. The last leg higher from the December low to the all-time high at 1278.53 in the MSCI Emerging Markets Index produced a classic parabolic move. Technical analysis is full of examples that such moves tend to be followed by sharp corrections.” 

“It would require a significantly bigger fall to undermine the long-term upside trend that has been in place since the beginning of 2016 (when concerns about China faded and the markets realised that the Fed will be raising rates gradually).”

“The first crucial line of defence for the bulls is the trendline support from the post-US presidential election low currently at 1141.56. Below that, the ascending trendline from the 2016 low would be crucial to watch at around 1027 given that a break lower would be a major negative signal for the CEEMEA currencies.”