MW A surging U.S. dollar is hammering emerging-market stocks and metals. Watch out.
By William Watts
Overbought dollar could lead to trend change, with knock-on effects for other assets, analyst says
The U.S. dollar remains an unabashed beneficiary of Donald Trump's presidential-election win - and its relentless rise is causing significant pain for some emerging-market assets and commodities.
It also sets the stage for further volatility if traders decide the dollar rally has gone too far, too fast.
"The dollar is overbought and challenging resistance while several metals and emerging markets (EM) are oversold and trying to hold above key support," said Kevin Dempter, analyst at Renaissance Macro Research, in a Thursday note.
"We'll be watching how they respond to their overbought and oversold conditions closely. A strong response to the overbought condition in the dollar will likely lead to a bullish trend change and vice versa for the metals and EM," he said.
The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, jumped 2.1% from election day through Wednesday's close, trading at its highest in a year. The index, heavily weighted toward the euro $(EURUSD.FOREX)$ and Japanese yen $(USDJPY.FOREX)$, has rallied more than 6% since late September, when Treasury yields began rising in response to both strong economic data and expectations for a Trump victory that could lead to larger fiscal deficits, more inflationary pressure and fewer rate cuts by the Federal Reserve.
The dollar rally has continued, in a move partly attributed to those factors and to expectations that wide-ranging tariffs on imports would boost demand for the U.S. currency relative to its peers.
See: Another Trump presidency could be a boon for the dollar - but some expect a bumpy ride
Broadly speaking, a rapidly strengthening dollar can cause pain for emerging markets, sucking away foreign investment and capital. It also makes it more difficult for emerging-market borrowers to pay dollar-denominated debts. The iShares MSCI Emerging Markets exchange-traded fund EEM fell 4.7% from Election Day through Wednesday's close and is down 8.8% from its recent peak on Oct. 7.
U.S. stocks have soared, outpacing developed and emerging markets alike. The S&P 500 SPX on Monday closed above the 6,000 milestone for the first time, after it, along with the Dow Jones Industrial Average DJIA and the Nasdaq Composite COMP, last week saw their biggest weekly gains of 2024. The S&P 500 remains up more than 25% in the year to date.
A stronger dollar can also be a weight on commodities priced in the unit, making them more expensive to users of other currencies. Copper futures (HG00) have dropped 8.7% since Election Day and are down more than 21% from a record high set earlier this year, having suffered a retreat on disappointment in growth in China and the country's stimulus efforts.
Other industrial metals have also suffered, while gold (GC00) has pulled back after setting a series of records this year.
Commodities Corner: Why gold prices are now dropping on the heels of Trump's win
Gold miners, tracked by the Van Eck Gold Miners ETF GDX, have retreated sharply, turning deeply oversold and approaching support at the 200-day moving average, Dempter said. A break below that support level, which stood at $35.19 Thursday, according to FactSet, would be a signal to start rotating out, he said.
The rising dollar has battered oil futures (CL.1), which have also been contending with weak China demand and rising production outside of the Organization of the Petroleum Exporting Countries and its allies.
Meanwhile, Asia stands to suffer the most if the dollar continues its upside tear, said Stephen Innes, managing partner at SPI Asset Management. A surging dollar has battered the region before, slamming local-currency debt, which he described as the backbone of Asia's emerging markets.
Some relief may be in store, however, if the dollar sticks to its pattern of seasonal weakness in December - a scenario that Mark Newton, head of technical strategy at Fundstrat, sees as likely. He noted that December has been the worst month of the year for the ICE U.S. Dollar Index over the last 10 years, with an average decline of 0.95%.
"Overall, the key takeaway is that despite this ongoing downtrend over the last month, EEM is likely to stabilize in December as [the] U.S. dollar begins a month-long retreat," he said. The two key areas to watch for the emerging-markets ETF, he said, are support at $42.50 and, below that, $41.
Need to Know: Here's how tariffs can be implemented without rocking markets, Trump-friendly strategist says
-William Watts
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(END) Dow Jones Newswires
November 14, 2024 13:57 ET (18:57 GMT)
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