EM FX rally does look stretched – Rabobank

According to Piotr Matys, EM FX Strategist at Rabobank, the impressive rally driven by signs of recovery in the global economy amid accommodative monetary policy allowed the MSCI EM FX Index to fully reverse the precipitous fall from the 2014 high to the early 2016 low.

Key Quotes

“While the EM currencies had a very encouraging start to 2018, there are warning signals that a correction may unfold over the short-term.”

“Momentum indicators are looking stretched with the RSI in the overbought territory. One could argue that the RSI reflects the strength of the underlying bullish trend. That said, on many previous occasions when the RSI exceeded the 80 threshold it was soon followed by either a corrective pullback, as investors booked their profits, or a period of consolidation.” 

“Another technical indicator that measures momentum – the MACD – also implies that the MSCI EM FX Index could be close to an important short-term top. The MACD Line is currently around the area that previously coincided with the MSCI EM FX Index running out of steam and either consolidating its gains or falling over the short-term horizon.”