Emerging markets rally helped by U.S. dollar

The rally continues with China showing signs of catching up to the rest of emerging markets. China ADRs traded on U.S. exchanges that have seen their premium shrinking for over two months are now showing signs of stabilization, 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 in these equities as they catch back up. Past performance however, does not guarantee future moves.

The effects can also be found within China ETFs such as the iShares FTSE China 25 Index Fund (FXI, quote) when compared to the emerging markets ETF (EEM, quote).

HSBC’s Final Manufacturing (PMI) of 50.5 for China ticked higher than expectations of 50.4 yesterday, on top of last month’s 13 month high, confirming Emerging Money’s Tim Seymour’s China trade.

In 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 and Richard Ross’s technical analysis of the dollar index to the mix 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.