EM Rundown: USDRUB Blasts Off as Ukraine Ceasefire Starts to Fray

If traders were to create a (false) dichotomy between weeks when G10 currencies are more volatile and weeks when emerging market currencies are more interesting, this week would undoubtedly fall into the former category. With BOE Minutes, monetary policy decision from the Fed and SNB, the ECB’s TLTRO auction, and of course, Scotland’s highly-anticipated independence referendum, there should be plenty of action in the major currency pairs. That said, there have been some under-the-radar technical developments in EM FX pairs that could present strong trading opportunities this week.

USDCNH: Weak Data Drives Big Breakout

As a general rule of thumb, when China sneezes, other emerging markets catch a cold… and China was hit with a surprisingly strong sneeze last week. As my colleague Chris Tedder noted earlier today, both Retail Sales and more importantly, Industrial Production, missed expectations in the world’s second-largest economy. Combined with last week’s comments that China is more focused on reform than stimulus from Premier Li Keqiang last week, the Middle Kingdom may simply settle for lower, more sustainable growth rate moving forward.

USDCNH has spiked sharply higher on the back of this weekend’s disappointing data, taking the pair out of the bearish channel highlighted last week. With rates also trading above both the 50- and 200-day MAs, the pair may rally further toward 6.1830 (38.2% Fibonacci retracement) or 6.2000 (50% Fibo) from here.

USDRUB: All Aboard! Next Stop 40.00?

The other source of EM volatility is (and stop me if you’ve heard this one before) Russia. Over the weekend, Ukraine’s Prime Minister declared that the country was still “in stage of war” and Russia is the “key aggressor” in the conflict. With news that the fragile ceasefire agreement in Eastern Ukraine is fraying, traders have chosen to sell the ruble first and ask questions later.

USDRUB has surged to a new all-time high above 38.00 today, and the current technical picture suggests that the pair may continue to rally from here. Rates remain above their two-month bullish trend line, with both the 50- and 200-day trending higher. The MACD is also moving higher above its signal line and the “0” level, showing growing bullish momentum. Finally, today’s price action also suggests further gains in the short term, with rates putting in a Bullish Marubozu Candle.*

With rates already at an all-time high, there are obviously no levels of previous resistance above the current price. Therefore, bullish traders may start to set their eyes on the psychologically significant 40.00 level if the peace agreement breaks down again. At this point, only a reversal back below bullish trend line support near 37.00 would shift the bias back to the downside.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.