EM currencies have fallen to the lowest level against the USD since the Asian financial crisis in 1997/98. The commodity collapse has driven the EM FX fall: the next driver is likely to be higher US rates.
We see CA deficit currencies like the TRY, ZAR, BRL and COP vulnerable to higher USD funding costs - CNY and CEE currencies are the anchors of stability.
China risks, continuing downward revision of EM growth forecasts and local dynamics remain medium-term EM concerns.
Over the coming 3 months, Fed rate expectations and the oil collapse should weigh on EM FX, particularly on CA deficit currencies and the RUB. Over 3-12 months, we expect selective EM currencies like MXN and ZAR to stabilize on a shallow Fed hiking cycle, valuation and recovering commodities.
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