Energy futures are resolving higher from multi-year bases. Stocks are pressing to new highs all along the cap scale. And the more cyclical, value-oriented markets are catching a bid and becoming leadership groups again -- think financials and energy.
It appears everything is falling into place. But a few pieces are still missing…
For instance, you might assume the US dollar is under pressure as commodities and stocks outperform.
But it’s not.
In fact, the dollar made new 52-week highs not long ago and has since consolidated at the top of its range while riskier areas of the currency market have struggled to catch a bid.
We’ve highlighted the US Dollar Index and the mixed signals coming from developed currencies in recent posts.
Today, we’re going to turn our attention to emerging currencies to understand this missing piece of the puzzle better.
First, we have a weekly chart of the Emerging Currency Fund ETF $CEW:
Emerging market currencies are a risk-on play and have a strong historical correlation to other risk assets.
It would make sense to see them moving higher here, but we’re seeing the opposite as the Emerging Market Currency ETF is trading just pennies away from fresh 52-week lows.
From a structural perspective, CEW is in a clear downtrend, stuck below a decade-long trend line.
Whether CEW digs in and defends its year-to-date lows near 17.75 or completes this topping pattern and breaks lower will be critical information.
A break lower would indicate continued US dollar strength, further challenging the rally in risk assets and the global growth narrative. On the other hand, a bounce off this key support level would fit into the broader intermarket picture and support the price action we’re seeing in stocks and commodities.
If CEW does roll over, we want to sell weakness if and only if it’s below 17.70 with a tactical downside target of 17.15. Our bias remains neutral until then.
If the Emerging Currency Fund ETF is losing a crucial support level, we’d imagine that weakness is spilling over to more and more individual crosses.
One pair we want to keep an eye on is the USD/BRL:
The USD/BRL cross has been consolidating in a sideways range between key extension levels since spring 2020. After being rejected at the 5.90 level multiple times, it appears USD/BRL is set to challenge these former highs yet again.
If and when it closes above 5.90, we want to be buyers on strength with an upside objective around 7.65. We have no business taking a shot at USD/BRL from the long side until its current consolidation is resolved.
Like the USD/BRL, the USD/MXN is another emerging currency cross nearing a critical area of former resistance:
For the past seven months, price has been tightly wound between the 20.71 and 19.56 levels. It's currently pressing on the upper boundary of its current range and testing its highs from last month around 20.90.
We want to get long on a break above last month’s highs with a target of 22.62. USD/MXN is a no-touch until it takes out those prior highs.
These are just a few examples of the broadening USD strength taking place among emerging currencies.
And it’s another piece of the intermarket puzzle that doesn’t quite fit.
Currency markets have been out of sync with the rest of the market for months. It was a key theme heading into Q4 and is still a key theme a month later.
We’ll be keeping a close eye on these emerging currencies in the coming weeks and months, looking for follow-through and confirmation from other crosses. Stay tuned!
