A more positive outlook for EM FX: to outperform the US dollar in 2019 - ABN Amro (written back in Dec 2017)

Georgette Boele, Co-ordinator FX & Precious Metals Strategy at ABN Amro argued back a the beginning of the year, before the Turkey crisis reared its ugly head, that for 2019 they were positive on emerging market currencies versus the US dollar because they expected the US dollar to weaken and US treasury yields to stabilise and then edge somewhat lower in 2019. So here is what a more positive outcome for EMs might look like if financial markets come out of this potential crisis unscathed. 

Key Quotes:

"Moreover, we remain positive on our commodity price outlook for 2019."

"Furthermore, it is likely that the positive momentum in global trade and global growth will continue in 2019."

"In general, emerging market central banks will probably move towards tighter monetary policy and this is also EM FX supportive."

"It is likely that the market focus is back on the ECB in 2019. Therefore, most EM FX will probably not outperform the euro in 2019. This with the exception of the Central European currencies CZK, PLN and HUF because their central banks will hike more aggressively than the ECB in our view."

"In our base scenario we assume that tightening by the Fed and higher US Treasury yields will not upset financial markets in 2018. We expect investor sentiment to remain relatively constructive. We also assume that NAFTA negotiations will be difficult but that the outcome in the end will be constructive."

"Furthermore, the modest slowdown of Chinese economy should not disrupt financial markets as this is well anticipated. However, a larger-than- expected slowdown will probably result is a considerable risk aversion wave in financial markets."