(Bloomberg) -- As the Argentine peso and the Turkish lira endure their worst weekly selloffs in years, one trading pattern suggests there’s reason for optimism on currencies from developing nations.
Sixteen of 24 emerging-market currencies tracked by Bloomberg, including the peso and lira, hit oversold levels within the past 30 days, and another three are just a smidgen away from the mark, according to their 14-day relative strength indexes. That’s after they tumbled 2.3 percent on average during the past month, the biggest decline since November 2016.
The last time this kind of correlation occurred was in August 2015, when 19 currencies had an RSI below 30, indicating they may have been oversold. That was in the middle of a four-month selloff that preceded the multi-year bull market that only began to sputter this year.
"If you factor in ‘oversold’ to the broader notion that EM fundamentals are still solid, you have a good rationale for looking through the current turbulence and staying in EM," said Sonja Gibbs, a senior director at the Institute of International Finance in Washington, a trade group created during the international debt crisis of the early 1980s.
Granted, a downswing in RSI is hardly unexpected as currencies depreciate, especially if they tumble as much as the peso and the lira did this week, and RSI isn’t always the most precise indicator to predicting movements in currency markets. What’s more telling is when prices and the RSI diverge, which isn’t happening now.
The peso and the lira tumbled 10.7 percent and 4.8 percent respectively during the past five trading days, leading emerging-market losses, as investors lost faith in the credibility of the two nations’ central banks.
Technical indicators also generally lend themselves better to more liquid securities such as G-10 currencies, according to Eric Viloria, a strategist at Wells Fargo in New York. Still, he said that while emerging-market currencies may soften further short-term, they’ll probably recover down the road on renewed U.S. dollar weakness.
And then there are the analysts. All told, the median forecast of the group surveyed by Bloomberg is an up-arrow. They expect the Argentine peso to rally 4.6 percent by year’s end to 21.39 per dollar, and predict the lira will climb 3.6 percent to 4.10.
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