The world of foreign exchange is abuzz with potential game-changers! A nuclear deal on the horizon? That's right, folks! The indirect talks between the US and Iran in Geneva have sparked hope for a potential agreement, with Iran's Foreign Minister Abbas Araghchi announcing a "general agreement" that could ease sanctions and reduce the threat of war. But here's where it gets controversial: despite this positive news, scepticism remains high, and the impact on crude oil prices has been relatively muted.
If this deal materializes and leads to improved relations, it could be a significant boost for global sentiment and further strengthen the performance of emerging market currencies (EM FX). We're bullish on EM FX this year, with forecasts indicating notable gains for certain currencies. So far in 2026, LatAm FX has taken the lead, with BRL and MXN topping the charts as the best-performing EM currencies year-to-date.
But what's driving this optimism? Well, there are several global macro factors at play. Firstly, the outlook for global growth this year looks promising, and if our assumptions hold true, it will sustain the positive carry momentum. Here's a bold prediction: President Trump is unlikely to increase the average effective tariff rate this year, especially with the mid-term elections in November. After all, lowering the cost of living is a priority, as evidenced by a December Ipsos/Reuters poll where 56% of respondents disapproved of Trump's handling of this issue. Polls suggest the Republicans may lose the mid-terms, so Trump's focus will likely be on changing that outcome, making further tariff increases unlikely.
Secondly, fiscal stimulus in key economies, including the US, China, Germany, and Japan, will provide a much-needed boost to global growth. And thirdly, two years of monetary stimulus in most major developed economies will help sustain demand in 2026, with the US and the UK still expected to ease further.
These factors, combined with low inflation rates in many emerging markets, create a perfect storm for EM FX. Annual inflation in Mexico has been consistently below 4% (the top end of Banxico's inflation target range) throughout 2025, except for two months, marking the longest period since 2015-16, excluding the COVID era. Similarly, South Africa has seen inflation below 4% for the longest stretch since 2004-05, again excluding the COVID period. Chile has low inflation, Brazil's is trending downward, and much of Asia is experiencing low inflation rates. In a world where investors are increasingly concerned about inflation, this is a massive positive for EM FX.
Our top picks for EM currencies this year include ZAR and CLP, which we expect to gain close to 7% by year-end. MYR and KRW are also forecast to gain around 5%, and they should benefit from a recovery in JPY and moderate gains for CNY in the Asian region.
So, the trends in FX and bond market volatility remain favorable for EM FX performance. But here's the part most people miss: this is not just about the numbers; it's about the potential for a more stable and prosperous global economy.
What do you think? Is this a promising outlook, or are there hidden risks that could derail these predictions? Share your thoughts in the comments; we'd love to hear your insights and engage in a thought-provoking discussion!
