With US stocks officially in correction territory, the CEEMEA currencies are vulnerable to the prospect of capital outflows from risky assets, suggests Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“Initially the CEEMEAs showed an incredible resilience to the rout in global stocks. However, when the sell-off in US equities resumed on Thursday (the Dow Jones plunged more than 1,000 points for the second time in four sessions and the S&P 500 Index closed at the lowest level in two monhts), the upside pressure on USD/CEEMEAs increased across the board. EUR/CEEMEAs also gained traction, although to a lesser degree as the euro softened against the US dollar.” 

“It is too early to abandon the long-term positive view for the emerging markets given that the synchronised recovery in the global economy should continue for at least another year and major central banks are unlikely to withdraw their unprecedented stimulus too fast. However, there is no denying that the biggest fall in global stocks so far this year undermined appetite for risky assets.”

“Earlier this week Reuters reported that foreign investors have pulled almost USD 4bn out of emerging markets since Jan. 30, according to data from the Institute of International Finance (IIF) – the biggest slump since the 2016 U.S. presidential election. The pace of outflows most likely has accelerated given that the MSCI EM Stock Index extended its losses to move than 10% heading for the biggest weekly fall since September 2011.”

“To stem outflows from EM assets and to reduce the risk that the selling pressure on the CEEMEA currencies may increase significantly a convincing rebound at least above the 2695~ pivot would have to unfold in the S&P 500 Index. It may prove a difficult task for the bulls who have been bashed by the bears over the past few days.” 

“A close below the trendline support from the US presidential election low would favour further retracement next week with the area at 2510/2484 providing another line of defence for the bulls.”

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