Emerging stock markets under downside pressure from stronger USD/CNH

Watch 6.8000 on the USD/CNH & 43.40 on the iShares Emerging Markets ETF for a potential bearish breakdown.

Intermarket relationship between emerging stock markets & USD/CNH

click to enlarge chart

  • Since 26 Oct 2018, the 17% rally seen in emerging stock markets as represented by the iShares Emerging Markets ETF (EEM) has been moving in direct lock-step with the movement seen in the inverse of USD/CNH pair which indicates that a stronger CNH (offshore Chinese Yuan) against the USD has been supportive on the on-going rally seen in emerging markets equities and vice versa if the opposite occurs.
  • In addition, the 90-day Pearson’s correlation coefficient is showing a strong positive level of 0.7 which suggests a high degree of direct correlation between the movement of the EMM and USD/CNH (inverse).

USD/CNH - Bouncing off from 6.68/65 key medium-term support

click to enlarge chart

  • The decline from its major swing high of 6.9800 has managed to halt at a key medium-term support zone of 6.68/65 (the former swing high area of 26 Sep/17 Nov 2017 & 38.2% Fibonacci retracement of the entire up move from 27Mar 2018 low to 31 Oct 2018 high).
  • Momentum has turned positive as indicated by the daily RSI oscillator.
  • A break above 6.8000 on the USD/CNH is likely to see a further potential push up to target the next intermediate resistance at 6.8600.

iShares Emerging Markets ETF (EEM) – Under downside pressure

click to enlarge chart

  • A potential bullish breakout seen in USD/CNH is likely to lead to further weakness seen in the emerging stock markets given their strong degree of correlation.
  • Momentum remains weak on the EEM as indicated by its daily RSI oscillator.
  • 44.80/45.00 as the key medium-term pivotal resistance on the EEM and a break below 43.40 is likely to open up scope for potential multi-week decline to target the next supports at 41.60 and 40.20.
  • On the other hand, a daily close above 45.00 invalidates the bearish scenario for an extension of the corrective up move towards the next resistance at 48.45/50.18    

Charts are from eSignal


This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.