A weakening dollar to end 2022 is exactly what bullish emerging markets (EM) traders need, especially if the momentum carries over into the new year.
Looking at the ICE U.S Dollar Index, the greenback has been losing its steam over the past few months with the index falling about 4%. That runs counter to the upside trend that has been persisting for most of the year as rising interest rates have been feeding into a stronger dollar.
With a rising dollar comes weakness in EM countries, particularly since their performance can be tied to that of the local currency against the greenback. If the U.S. Federal Reserve decides to back off from further rate increases, this could be exactly what EM assets need in order to reverse the downtrend.
“As the U.S. dollar tumbles from multi-decade highs, some investors are betting emerging market currencies will be big winners from a sustained reversal in the greenback,” a Reuters article said.
Conversely, a weaker greenback is pushing EM currency indexes higher. As mentioned, this could bode well for EM assets as long as the trend can persist.
“The MSCI International Emerging Market Currency Index is up nearly 5% from its lows and notched its best monthly gain in about seven years in November, as expectations that the Federal Reserve will soon slow the pace of its interest rate hikes bolstered the case for investors betting on emerging market currencies,” the Reuters article added.
Play the Bullish Momentum
If the positive momentum continues to feed into more bullishness for 2023, traders will want to consider the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC). The fund is particularly useful if traders are looking to utilize built-in leverage in order to maximize gains.
EDC seeks daily investment results equal to 300% of the daily performance of the MSCI Emerging Markets IndexSM. The fund invests the majority of its net assets in financial instruments like swap agreements and securities of the index, ETFs that track the index, and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.
The index is designed to represent the performance of large- and mid-capitalization securities across 26 emerging market countries. Looking at its top holdings, there’s a tilt towards China, India, and Taiwan.
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