Many emerging market currencies trade in the same direction as stocks. That is, many of the emerging market currency U.S. dollar pairs trade inversely with stocks. So, if stocks move lower, emerging market U.S. 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 23 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 Feb. 20 highs to the March 23 lows.
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 24. The pair has been consolidating sideways in a pennant formation since then. If it does break higher, the current target is above 30.00.
Over the same Feb. 20 to March 23 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 6 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 Jan. 2.
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.
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.
