What the US PMI signals to emerging markets currency investors
In Part 3 of this series, we saw how the emerging markets (EEM) (VWO) currency and commodity spread may be indicative of the beginning of a reversal in the current surge in emerging markets currencies (CEW). Another vital indicator in this regard is the US Purchasing Managers Index, the US (SPY) (IWM) PMI.
US manufacturing also has a bearing on emerging market currencies. When US manufacturing accelerates, it generates demand for commodities and other imports from these emerging markets. The rise in demand for goods from these (exporting) emerging markets, adds to the demand for their currencies, thereby benefitting the foreign exchange rate in their favor. US manufacturing uptick thus leads to an uptick in emerging market currencies.
The US PMI has moved in tandem with EM currencies
Interestingly, the US PMI has also largely moved in tandem with the emerging markets currency index. Notice the fall post mid-2014; the EM currency index and the US PMI both declined until 2016. At the onset of 2016, when the US PMI reversed its trend, the emerging markets currency index also changed gear.
Now, in 2017, the US PMI has again changed course. What remains to be seen here, is whether the emerging markets currency index will follow the US PMI once again, and reverse course?
Let’s now move onto our third and final chart signaling a trend in emerging markets currencies in the next part of this series.