It is time for a correction in the EMEA FX markets – at least if one believes the signals from our EMEA FX Scorecard. Over the last 24 hours our Scorecard has turned negative for most of the EMEA currencies and the total score is now negative for the first time since March-April. This is an indication that we are in for a correction in the EMEA FX markets and we therefore recommend taking off some risk from the books and reducing exposure to the EMEA FX markets. Most at risk according to the Scorecard are the Hungarian forint and the South African rand.
Why has the EMEA FX Scorecard turned negative?
- 1) Carry protection is disappearing. As we stated in New Europe Weekly published on Friday markets have aggressively been pricing rate cuts across the EMEA region recently. Hence, investors are no longer being paid any significant carry to be long in any of the EMEA currencies.
- 2) Technical factors are turning negative. The technical score in our Scorecard is turning negative for a number of currencies as key technical levels have been broken and are weaker than or close to key moving averages for a number of the EMEA currencies. EUR/PLN, EUR/CZK, USD/TRY and USD/ZAR have all moved higher than their 20 and 50-day moving averages and EUR/HUF is closing in on the 50-day moving average as well. EUR/CZK is moving closer to the 200 days
- 3) Global conditions turning less supportive. Even though our score for global economic and financial conditions remains positive for all EMEA currencies, the signs of softness in the US stock markets are reducing these scores. Furthermore, US government bond yields have been inching upward recently, which reduces the support for risk assets like EMEA currencies. That said, it should be noted that global macro conditions remain supportive for the EMEA FX markets.
