Shock risks remain present for emerging market currencies
|Summary
The possibility of an external shock to global financial markets remains ever present and is the biggest risk to upending this year's rally in emerging markets FX. The most obvious external shocks stem from a less dovish Federal Reserve and, despite a tentative trade framework reached between the U.S. and China, a deterioration in the U.S.-China relationship. In either scenario, or some other exogenous and unforeseen shock, emerging market currencies are most sensitive and can experience sharp corrections. But not all EMs are built the same. Underlying fundamentals dictate FX vulnerability to a shock, and in this note, we update our EM FX vulnerability framework to gauge which EM currencies could see the largest depreciations should an external—or even domestically driven—adverse scenario materialize.
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