Global Market Shift: A New Era for Emerging Markets?
As we step into 2025, the US stock market is poised to wrap up two remarkable years. But what about the rest of the world? Could this be the year of mean reversion beyond American shores?
The Dollar’s Impact on Emerging Markets
To explore this possibility, let’s examine the Emerging Markets ETF (EEM) and the iShares China-Large-Cap ETF (FXI). However, we can’t discuss these foreign ETFs without considering the US Dollar Index (USD). The two are intricately linked, with a strong negative correlation.
A Brief History of the US Dollar
The USD began its upward trajectory in 2011, peaking in 2016. From 2015 to 2022, it consolidated in a sideways, bullish pattern before breaking out in 2022. After reaching a high in September 2022, the USD plateaued, only to surge again in September 2024, climbing from $100 to a recent peak of $108.
Chart Resistance and a Potential Peak
The USD appears to have completed a five-wave advance, hitting chart resistance in the $108 region. Meanwhile, the Commitment of Traders (COT) data, which turned bullish in September, has now returned to neutral. It’s possible that in the next week or two, the COT data will shift bearish on the USD.
A Shift in Global Market Dynamics
With the USD potentially peaking, the stage is set for a reversal. This could be the catalyst for emerging markets to reclaim their footing. As the dollar’s influence wanes, EEM and FXI may finally get their chance to shine. Will 2025 be the year of global market rebalancing? Only time will tell.
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