Emerging Market currencies show there is more to the rally

The emerging market currencies from Latin America to Asia have had a wild start to the year but the future prospects are starting to look a bit promising. On a year to date basis, the Wisdom Tree CEW emerging currency ETF has as a return of -0.65% and -7.49% on a 3 year average return. However, it seems like that is about to change as both technical and fundamentals are starting to hint at the emerging market currencies likely to push higher ahead of a short term pullback, making it an opportune time to delve into this trade.

First off, the Wisdom Tree Emerging Currency Strategy Fund or CEW has a broad mix of currencies. From Brazil and Mexico among other Latin American countries to Russia and India and China in Asia, the CEW has a largely diversified mix. The weighting is given more to Asian currencies, which make up 45.47% of the fund, while Europe, Middle East and Africa make up 27.36% of the fund followed by Latin America's 27.17%. Broadly put, this emerging market ETF came under pressure early this year led by the tremors from China which rubbed into the US equity markets and sent the risky assets into a tailspin during the first two months of this year. However, the CEW has managed to weather the storm and in fact has posted a steady 7.95% return since establishing a bottom at 16.16.

At the core of the emerging markets are the Federal Reserve’s policies. While the year started off on a pessimistic note of tightening monetary policy, the latest rhetoric from the Fed at its March 16th meeting managed to soothe investor concern as the Central bank signaled a slower pace of rate hikes while also maintaining an accommodative monetary policy. Of course, US domestic growth will be at the core of the Central Bank's policies but the Fed will also be looking into the broader market scenario at large.

CEW – It’s all about the resistance

The technical chart for CEW shows prices currently stalling near an established resistance level of 17.54 – 17.58, with the most recent price action testing this level previously formed at 12th September 2015. The interesting bit of this price action is the potential inverse head and shoulders pattern that is likely to form. Of course, the pattern is not yet established but a higher low being formed against the recent bottom near 16.16 will likely paint a bullish picture in prices. Forming the right shoulder near 17 – 16.5 and a subsequent break above the neckline resistance at 17.54 – 17.58 will propel CEW higher towards 18.50 as the minimum price target.

When looking at a weekly time frame, it gets more obvious as price is seen pushing higher after an upside breakout from the outer median line. A higher is expected on the pullback, which coincides with the potential inverse head and shoulders pattern that is taking shape currently. This could see prices pushing higher and eventually to the 18.50 handle 18.94 – 19.0 highs.

It is likely that this scenario will take a few months at the very least to be played out, but watching the CEW is likely to say a lot in terms of the US policies will likely shape the global market sentiment.