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U.S. DOLLAR/CHINESE YUAN

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2016 can be another year of weak performance for the emerging markets. USD/CNY chart will have significant impact on emerging market currencies and equities. In the second half of 2015, sharp devaluation of the Yuan resulted in a sell-off in emerging market equities. Current technical outlook for the USD/CNY suggests further devaluation for the Chinese currency is likely in the coming months. A runaway price movement on USD/CNY can trigger another wave of selling in the emerging market equities.

USDCNY

MSCI EM

Already, emerging market equities are underperforming the developed markets. This trend is likely to continue if the above two (sharp devaluation of the Chinese Yuan and another sell-off in emerging market equities) takes place in the following months.

MSCI DM VS MSCI EM

MSCI WORLD MARKETS vs. MSCI EMERGING MARKETS

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Central banks across the globe are showing their support for the financial markets by either delaying interest rate hikes or cutting interest rates and showing willingness to increase quantitative easing measures. After the ECB’s dovish comments, Chinese central bank cut interest rates to boost economic growth.

Since 2011, markets are positioned for emerging market weakness and this trend continues to remain intact irrespective of interest rate cuts or additional monetary stimulus by central banks. Emerging markets continue to underperform developed markets as the ratio between MSCI World Markets/MSCI Emerging Markets shows. This trend is likely to continue in the following months.

MSCI DM vs. MSCI EM