In a previous post, we looked at the USD against emerging market currencies and our view is the USD could rally strongly against the MXN and ZAR. The USD is trading above its lows and we think it’s getting ready to move sharply higher. Our view of the fundamentals, sentiment, and key technical levels to watch below.
Fundamentals and Sentiment
Emerging market currencies such as the MXN and ZAR have been strong due to the fact that money has poured into emerging markets due to huge global central bank stimulus and the view, there will be a strong global economic recovery. This recovery is now discounted in our view and central bank stimulus while it’s been huge is set to peak which can be seen on the chart below from Morgan Stanley which in our view will lead to weakness in the emerging market currencies.
In terms of the USD, the market sentiment is bearish and we have the largest short position in the USD since 2011. Speculators are heavily short the USD against all emerging market currencies which points to limited downside and a major upside rally in our view as the bearish sentiment peaks and speculators exit shorts.
Note: The charts below give the key levels of support and resistance in our view to watch and in terms of the targets for long trades there derived from our model of sentiment and how short speculators are in terms of the two pairs.
Technical Analysis
USD/MXN
We have seen the USD rally from chart lows and the first rally retraced back to 20.00 and then we pushed off again to the upside. We now view the USD as a buy on an upside breakout above resistance if however, we were to break support we would key off the 20.00 level on strength to get long. The USD has confirmed a bottom in our view and we think it’s a buy on strength or on a pullback for a move up to 22.00.
USD/ZAR
Unlike USD/MXN we have not seen any significant strength in the USD yet we are trading above chart lows and support is strong in and has held since December – If the USD can break above this week’s high and above resistance, we think a trend reversal to the upside will be confirmed and we are looking for a move to 16.00 with a possible run on to 17.00.
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