📝A Tech-Driven Correction Likely to Push EMFX Lower: ING

Below we show the daily correlations, via dollar cross rates, between a group of currencies against both the Philadelphia Semiconductor Index (SOX) and the broader tech sector represented by the Nasdaq 100.

Looking at correlations since the tech sector began to surge at the start of April, within the G10 space, it is the Swedish krona which retains its mantle as the most tech-sensitive currency, while the yen is the least correlated to the sector. And somewhat surprisingly, it looks like the big beasts in EM FX are trading collectively against tech on a pro-risk basis.

Aside from the won and the Taiwanese dollar, which we discussed above, we normally think of the Israeli shekel as the most tech-sensitive currency in emerging markets. Capital raising by the Israeli tech sector can lead to inflows of as much to $5bn per quarter. However, recent correlations suggest most emerging market currencies have quite high correlations with US tech.

Any large, tech-driven equity correction would likely see USD/EM go very bid and initially provide support to the dollar across the board. That would be the first-round effect. The second-round effect, assuming that the Fed would come to the rescue with an easing cycle, would be a weaker dollar. In such a scenario, USD/JPY might be finally ready to turn lower. - ING