Emerging markets face 'wrecking ball' from tariff turmoil

Synopsis

Most emerging-market currencies will decline, according to Societe Generale strategists, who warned that China's yuan is set for a "modest" depreciation and that South Africa's rand and Latin American currencies will likely be stuck at weak levels. At Goldman Sachs, strategists said the dollar unwind will probably support exchange rates in other big developed countries, and not EM.

The upheaval coming from the Trump administration's tariffs is reinforcing views that the riskiest assets face more losses ahead.

Most emerging-market currencies will decline, according to Societe Generale strategists, who warned that China's yuan is set for a "modest" depreciation and that South Africa's rand and Latin American currencies will likely be stuck at weak levels. At Goldman Sachs, strategists said the dollar unwind will probably support exchange rates in other big developed countries, and not EM.

The "wrecking ball still underway in EM FX, but will slow," wrote analysts led by Phoenix Kalen at Societe Generale in London.

While the MSCI Emerging Markets Currency Index ended the week at a five-month high, conversations with investors showed pessimism toward the asset class is running high, with fund managers hunkering down for the trade war. The Columbian peso and the Indonesian rupiah fell the most among EM currencies last week.

"Even if the worst-case scenario doesn't materialize now, the current uncertainty is already causing damage," said Tamas Cser, who helps manage about $2.8 billion at Hold Alapkezelo Zrt. in Budapest. "Investment appetite is falling worldwide."

Stocks were hit hard, with the MSCI Emerging Market Index tumbling 3.7% in the week. Episodes of political upheaval this year in Turkey, Indonesia and South Korea have added to investor concern about taking risks in EM.

In Turkey, Morgan Stanley revised forecasts this week to indicate a weaker lira by year-end, and recommended against carry trades. The US tariffs turmoil has probably cost Turkey another $10 billion in foreign-exchange reserves, adding to losses incurred last month amid a domestic political crisis.

"Foreign positioning has likely been reduced further this week in response to tariff-related global risk-off, meaning that locals' FX demand will be the key determinant for the reserves outlook," wrote analysts including Hande Kucuk and Arnav Gupta at Morgan Stanley.

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