FALLING TREASURY YIELDS AND A WEAKER DOLLAR ARE HELPING BOOST EMERGING MARKET BONDS, CURRENCIES, AND STOCKS
TREASURY YIELD AND DOLLAR REMAIN WEAK... Treasury bond yields continue to weaken. Chart 1 shows the 10-Year Treasury Note Yield ($TNX) trading below its 50- and 200-day moving averages and just a couple of tics above its early February low. A drop below that earlier level would put the TNX at the lowest level since last October. The falling bond yield is also weighing on the U.S. dollar. Chart 2 shows the U.S. Dollar Index (plotted through Tuesday) falling sharply yesterday to the lowest level since last October. A close below that level would put the greenback at the lowest level in more than a year.
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Chart 1
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Chart 2
FALLING DOLLAR BOOSTS EMERGING CURRENCIES ... My weekend message about the dollar testing important chart support showed that most of the downward pressure on the dollar was coming from the British Pound and Euro, both of which jumped on Tuesday (along with most other foreign currencies). It also suggested that stronger European currencies were a sign of growing confidence in the European economy and stock markets. Emerging market currencies are also rising against the dollar. Chart 3 shows a generally inverse relationship between the Dollar Index and the Wisdom Tree Dreyfus Emerging Currency Fund (CEW). [The CEW includes fifteen emerging market currencies from Latin America, Eastern Europe, South Africa, and Asia]. Notice that the CEW peaked in spring 2011 when the dollar bottomed. A dollar pullback in mid-2012 boosted the CEW. A dollar peak last July coincided with a CEW bounce as well. Since the start of 2014, a weaker dollar has coincided with a rising CEW. A breakdown in the dollar would give an even bigger boost to emerging market currencies. That could have positive implications for emerging bonds and stocks. It's also worth noting that the CEW is bouncing off chart support along its 2011, 2012, and 2013 lows.
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Chart 3
RISING CEW BOOSTS EMERGING STOCKS... Chart 4 shows a positive correlation between Emerging Market iShares (red line) and the WisdomTree Emerging Currency Fund (green line). Both collapsed together last May (when Treasury yields surged) before bottoming together around Labor Day. After selling off together last October, they're now rising together. The message of Chart 4 is that stronger emerging currencies are good for emerging market stocks. That's why a dollar breakdown would be good for both. Another reason why a falling dollar is good for emerging markets is that many of them (like Brazil) are exporters of commodities.
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Chart 4
LOCAL CURRENCY EMERGING BONDS ARE RALLYING AS WELL... Another sign of improvement is coming from emerging market bonds. The black bars in Chart 5 show the Emerging Markets Local Currency Bond Fund (LEMB) exceeding its October high to achieve a bullish breakout. The driving force behind that rise is falling Treasury yields (green line). The two have been trending in opposite directions. The upward spike in Treasury yields last May caused a severe drop in emerging market bonds. The 2014 downturn in Treasury bond yields has driven money back into emerging country bonds. The fact that this fund is denominated in local currencies is another sign of rising confidence in emerging market currencies. The fact that all three emerging assets are rising together is a positive side effect of falling Treasury yields and a weaker dollar.
