Geopolitical Developments and Emerging Market Currencies
Recent reports indicate that geopolitical tensions may have lessened following indirect discussions between the U.S. and Iran in Geneva. Iranian Foreign Minister Abbas Araghchi mentioned that an “agreement in principle” on a potential nuclear deal could lead to eased sanctions and a reduced risk of conflict in the region. However, skepticism still surrounds the feasibility of this scenario, and any decline in oil prices has been rather limited.
If relations improve, it could bolster global sentiment, further supporting the outlook for strong performance in emerging market (EM) currencies. We generally have a positive perspective on emerging market currencies this year, anticipating notable gains for some of them. Latin American markets have been leading, with Brazilian Real (BRL) and Mexican Peso (MXN) emerging as the top performers so far in 2026. Various global macro factors seem to favor emerging foreign exchange, alongside specific elements. The predicted global economic growth appears reasonable, and if our expectations hold, we could see ongoing momentum in carry trades. Firstly, we doubt that President Trump will raise the average effective tariff rate this year; given the midterm elections on the horizon, controlling living costs is likely to be prioritized. An Ipsos/Reuters poll from December revealed that 56% of respondents disapproved of Trump’s approach to living costs. General polling implies that, with Republicans losing in the midterms and Trump possibly aiming to shift that outcome, increasing tariffs may not be the best strategy.
Secondly, fiscal stimulus measures in key countries this year are expected to bolster global growth. The U.S., China, Germany, and Japan will all ramp up spending. Thirdly, two years of monetary stimulus in most major advanced economies should continue to underpin demand as the U.S. and U.K. are also moving towards further easing.
All these factors collectively support EM foreign exchange. Furthermore, inflation remains crucial to positive investor sentiment in emerging markets. In Mexico, the annual inflation rate has stayed below 4% (the upper limit of Banxico’s target range) for almost all months in 2025, marking the longest stretch since 2015-16, excluding the COVID-19 period. Similarly, South Africa’s inflation rate has remained below 4% for the longest period since the early 2000s, again excluding that pandemic phase. Chile has a low inflation rate, Brazil’s is decreasing, and various parts of Asia are experiencing low inflation as well. This is quite favorable for EM currencies at a time when investors are increasingly mindful of inflation risks.
This year’s standout emerging market stocks include South African Rand (ZAR) and Chilean Peso (CLP), both up nearly 7% by year-end, while Malaysian Ringgit (MYR) and South Korean Won (KRW) are forecasted to rise about 5%, aided by a yen recovery and modest gains for the renminbi in Asia.
Overall, trends in currency and bond market volatility are likely to continue contributing positively to the performance of EM exchanges.
