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Emerging market FX selloff likely to continue for USD/ZAR, USD/RUB and USD/MXN

Emerging market currencies look likely to reverse recent gains before long, with long-term USD/RUB, USD/MXN and USD/ZAR uptrends expected to return before long​.

Emerging currencies at risk despite recent rise in yields

Emerging market currencies provide a key area for traders to utilize throughout periods of boom and bust. Typically, we see emerging currencies lose ground against the dollar over time, with those periods where that trend reverses largely coming as economic fears are allayed and treasury yields rebound.

That can be seen below, where falling yields are correlated with three inverted EM FX pairs (USD/RUB, USD/MXN, USD/ZAR). This negative correlation means that as long as yields continue to fall, we are likely to see further downside for emerging market currencies against the greenback.

With that in mind, this recent counter-trend move looks likely to continue if the outlook becomes clearly positive. However, any ongoing fears around the Delta variant or the recovery could seem FX hit once again.

USD/ZAR

USD/ZAR provides the first chart of note, with price having dropped perfectly into the 76.4% Fibonacci support level.

With the stochastic breaking out of the oversold territory, there is a clear signal that the bulls are coming back into dominance once again here. As such, another move higher looks likely here, but ultimately the bullish trend holds unless R11.51 low is taken out.

The daily chart highlights how we have broken from the downtrend established after the initial pandemic surge for this pair.

That push through trendline resistance does provide an initial signal that the bulls might be back in charge, yet a move through R15.57 would bring greater confidence that this downtrend is over.

USD/RUB consolidates within long-term uptrend

A similar story for USD/RUB, although the uptrend is somewhat less convincing. Nonetheless, we have seen price fall back towards the 76.4% Fibonacci support level at ₽71.08.

We have typically seen this market consolidate and drift lower for extended period of time, only to surge higher every once in a while. With that in mind, it looks likely we are in that latest consolidation phase, with another break higher expected to come down the line. A break below ₽68.03 would bring a more signal that we are due a more prologued period of downside.

This pair is clearly still well within a consolidation phase, although a break up through the ₽75.35 level would bring greater confidence that we are starting to build a more bullish move.

USD/MXN finding support on Fibonacci level

Once again we are looking at the 76.4% Fibonacci support level to come into play here for USD/MXN. The long-term uptrend provides a signal of further gains to come, with the recent inability to break below the MX$19.42.

Fibonacci support level highlighting the potential for another leg higher before too long. Much like USD/ZAR, we are looking at another break out of the oversold territory for the stochastic, with momentum clearly reversing in favour of the bulls.

The past three such signals have all provided strong long-term buying opportunities for the pair. A break below MX$17.45 would be required to negate that bullish long-term trend.

That recent basing effect can be seen clearly on the daily chart, with price failing to break below MX$19.54 bringing some initial confidence for bulls.

However, a push through the MX$20.75 level would be required to start building a more confident view that the next leg higher is taking shape.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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