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Can a Weaker Dollar Provide Momentum For This Emerging Markets ETF?

Ben Hernandez
·2 min read

This article was originally published on ETFTrends.com.

If the Federal Reserve holds fast to its commitment to keep rates low, that could keep on fueling a weaker dollar. This, in turn, will help translate into more strength for the local currencies of emerging markets and help funds like the momentum-based Invesco S&P Emerging Markets Momentum ETF (EEMO).

EEMO seeks to track the investment results of the S&P Momentum Emerging Plus LargeMidCap Index. The fund will invest at least 90% of its total assets in the securities of companies that comprise the underlying index, as well as ADRs and GDRs that represent securities in the underlying index.

Strictly in accordance with its guidelines and mandated procedures, the index provider compiles, maintains and calculates the underlying index, which is composed of constituents of the S&P Emerging Plus LargeMidCap that have the highest "momentum score." ETF investors get this factor-based strategy and EM exposure with just a 0.31% expense ratio.

In the past year, the fund gained 9%. Much of 2020 was retracing back to its pre-pandemic levels, but now EEMO could be poised for a strong 2021 as global markets heal and risk-on returns.

EEMO Chart
EEMO Chart

EEMO data by YCharts

If we pare down the chart to its 6-month timeframe and use technical analysis, we can see some buy signals forming. Using a relative strength index (RSI), EEMO just recently dipped below overbought levels.

Furthermore, using a moving average convergence divergence (MACD) filter, the exponential moving average (EMA) line is above its signal line so a buying opportunity could be presenting itself should the price move lower to an area of value. EEMO hasn't crossed below its 50-day moving average since late September.

EEMO Chart
EEMO Chart

EEMO data by YCharts

Looser EM Financial Conditions Due to Weaker Dollar

As mentioned, the Fed will play a hand in how EM will respond in 2021. A Yahoo! Finance article discussed investment themes to watch in 2021 with emerging markets being one of them.

'Because emerging markets have lots of exposure of credit denominated in dollars, a weaker dollar should loosen EM financial conditions, lifting activity across emerging markets,” said Renaissance Macro Research’s head of economics Neil Dutta.

“We know it sounds odd to be upbeat banks and energy with a Democratic sweep, but here we are. Usually, cyclical dynamics dominate political considerations. Capital spending has been quite sluggish in recent years and a return to normal should also provide a boost for EM,” wrote Dutta.

For more news and information, visit the Innovative ETFs Channel.

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