EM and EMEA EM FX Performance Comparison against USD in 2016

A set of bearish EM outcomes (Fed tightening, Chinese growth, yuan depreciation and a rise in EM corporate defaults) suggests that correlations in the EM space will stay elevated and could rise further in 2016. Taiwan and Chile have the biggest export exposure to China. Expectation of continued China's economic weakness suggests 2016 will deliver the fourth consecutive year of EM Asia currency weakness against the USD. 

"Short TWD and SGD will remain good proxies for the weaker China/higher USD/CNY theme. Such trades will also benefit from monetary policy divergence at the G3 level, which could be a feature of the landscape as we progress into 2016", outlines J.P. Morgan in a research report. 

Fresh capital outflow pressures, particularly in terms of offshore holdings of local bonds could add to the existing FX vulnerabilities. Weak FX reserve positions make the defence of such outcomes all the more difficult. MYR and IDR remain vulnerable, while INR and PHP should remain outperformers on a relative value basis, although offshore investors are likely to turn more cautious if the Indian reform agenda loses traction.  

"Overall, we expect the four GBI-EM currencies of THB, MYR, IDR and PHP to lose 6% on average next year", adds J.P. Morgan.

Despite some weakness against the dollar, EMEA EM FX is likely to perform better in 2016. CEE currencies and the rouble in particular are the likely bright spots. Significant weakening of EMEA EM currencies was seen in 2015 on account of dollar strength, lower commodities prices and rising concerns over EM growth. Some spill-over of these trends will be seen in 2016, but the intensity is likely to be lesser. 

With the worst of the economic downturn in Russia has already passed in 2015, Russia offers the highest carry in EMEA EM. While the rouble may struggle to appreciate in spot terms against the dollar, it can outperform lower carry currencies with weaker external balances.