Emerging Markets Rally Helped By U.S. Dollar

Includes: EEM, FXI
by: Emerging Money

The emerging market rally remains intact with China showing signs of catching up to the rest of the emerging markets. China ADRs that are traded on U.S. exchanges that have been seeing their premium shrinking for over two months are now showing signs they have begun to stabilize suggesting a shift is on the horizon. In the past when the premium consolidated for a period of time we’ve seen a nice bounce as these equities catch back up. Past performance and history however, do not guarantee future moves.

The effects can also be found within the China ETFs such as the iShares FTSE China 25 Index Fund (NYSEARCA:FXI) when comparing with the (NYSEARCA:EEM) ETF.

Yesterday’s China HSBC Final Manufacturing (PMI) of 50.5 ticking higher than expectations of 50.4, on top of last month's 13-month high, offers confirmation for Emerging Money’s Tim Seymour’s China trade.

In the month of November both the iShares FTSE China 25 Index Fund and iShares MSCI Emerging Markets Index Fund have outperformed the S&P 500 by 0.5% and 1.04% respectively.

Adding the U.S. dollar index to the mix and Richard Ross’ technical analysis of the dollar index we find a textbook head and shoulders pattern forming the right shoulder suggesting a move lower.

Is the dollar suggesting a fiscal cliff deal or rather that the cliff is not a drop off but more of a slope? The tailwind of the U.S. dollar continues to suggest the emerging markets rally will continue as market participants seek alpha.