Emerging markets FX vulnerability: Q2-2025
Summary
Risks to emerging market currencies are accumulating—primarily due to tariff uncertainty—with the possibility of a “shock” scenario materializing currently elevated. In this report, we update and enhance our EM FX vulnerability framework to identify currencies most at risk in a shock tariff scenario. But perhaps more importantly, we use our framework to develop a systematic approach to determine potential maximum sell offs should a shock indeed unfold. This systematic approach has been effective identifying peak depreciation levels during prior periods of market stress, and also acts as a useful “signal” for when EM currency selloffs may have overshot. Tariff “Liberation Day” could be the source of an external shock; however, idiosyncratic and localized shocks could also materialize for select currencies. Our methodology has also been effective in signaling hedge opportunities in times of domestically induced local FX volatility.
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Author
Wells Fargo Research Team
Wells Fargo
