EM Asia FX: Underperformance trend remains incomplete

The trends have extended into a number of critical levels, and the September/October reversals have caused some concern that the medium term trends are vulnerable, corrective retracements as selling opportunities against the USD. To that point, the October USD lows should continue to act as key support levels while maintaining the short term upside bias. New highs for these USD pairs will be accompanied by a new set of momentum divergences which could result in a growing risk of another corrective phase, but prefer to play for the underperformance while trailing the stop on any correct trade view. 

The setup for the ADXY highlights the potential for a continuation of the underperformance bias. The effective hold and impulsive reversal from the critical 109/110 resistance zone is consistent with the view that the trend is incomplete. This area represents the 38.2% retracement and the August breakdown area and should continue to act as a short term ceiling. Violations would question the potential for a continuation of the current trend and instead argue for a more protracted corrective phase. 

The critical hurdle remains the 106.30/105.30 support zone which represents the August low and the 76.4% retracement of the rally from the 2009 cycle low. Breaks would be a clear signal that a deeper extension can develop with targets near the 104/103.30 zone (Elliott projections) and then the 102.40/101 zone which includes the 61.8% retracement from the 1998 cycle low, as well as the critical low from 2009. 

Still, the critical focus will remain on USD/CNY and USD/CNH to see if the medium term uptrend can resume - the preferred view. In this regard, USD/CNH faces an important test at the 6.49/53 zone which represents the September peak, as well as the 61.8/76.4% retracements from the August high. 

Note the backdrop favors a sustained break of these levels in line with the medium term uptrend, the corrective nature of the decline from the August peak, as well as the bullish momentum framework. Moreover, the reversal from the October/November lows is consistent with a basing process particularly given the effective test and hold of critical support in the 6.29/31 zone and double bottom, as well as the 200-day moving average and August breakout zone.

Note that while the broad underperformance trend can extend into next year, the low yielders including SGD, KRW and TWD are expected to lead the way. The recoveries from October also show the best technical setup for these currencies versus the USD.