Top of the Morning: Emerging Markets - Monumental change
At a Glance
The desk posits that the recent shift in U.S. tariff policy, particularly the jump to an effective rate of 25%, is reshaping emerging markets (EM). Per the full note from UBS, this monumental tariff change not only disrupts trade flows but also acts as a catalyst for capital movement, potentially impacting EM investor portfolios. With the U.S. trade deficits likely to influence foreign capital inflows significantly, EM traders should recalibrate their strategies accordingly. The looming implication is a potential tightening of liquidity for EM economies that rely on foreign investment for stability.
Key Takeaways
- 01U.S. tariffs now stand at a historic 25%, significantly influencing global trade dynamics.
- 02Emerging markets may face increasing capital flow volatility as foreign investment strategies shift.
- 03The situation calls for a restructuring of EM investment portfolios to mitigate risks associated with U.S. economic policies.
- 04The outlook for select EM currencies may benefit from a recalibration in response to U.S. economic adjustments.
Full Analysis
What the desk is arguing
The desk firmly believes that U.S. tariff rates, which are presently 25% compared to pre-election levels of only about 2.5%, will have profound impacts on trade dynamics and capital flows to emerging markets. Per the commentary, Alejo Czerwonko, CIO at UBS, emphasizes that the U.S. must adjust its financing model due to these tariffs, which will lead to important considerations for EM investors moving forward.
The evidence supporting this view is underscored by the dramatic change in capital flows associated with the sharp increase in tariffs. The desk notes that persistent trade deficits in the U.S. could trigger a recalibration of how countries approach foreign investment, as foreign entities may seek stability and growth elsewhere, potentially leading to reduced inflows into U.S. capital markets and negotiating a broader EM strategy shift.
Where it sits in our coverage
Aligned firms project a bullish near-term view on key EM currencies against the dollar. Our consensus target sits at 1.075, with notable forecasts including: - JPMorgan: 1.10 (Mar-26) - Bank of America: 1.04 (Mar-26)
The desk's call is at the higher end of the spectrum in the current consensus, aligning with firmId JPMorgan, while diverging from the more cautious outlook from firmId Bank of America.
How other firms see it
A group of aligned firms, including firmId JPMorgan, suggest a more constructive outlook on select EM currencies, contrasting with firmId Bank of America's cautious positioning. The divergence points to underlying concerns about U.S. economic resilience amid these tariff changes.
Watch the USD/BRL and USD/INR pairs closely, as their movements may closely reflect shifts stemming from U.S. tariff impacts and capital flow decisions dictated by broader market sentiments.
What the calendar says
No high-impact events are on the horizon that could immediately affect this narrative, but continuous monitoring of trade data and upcoming policy announcements from the Federal Reserve could provide insights into the long-term implications of current U.S. tariff strategies on EM currencies.
Market Implications
Traders should closely monitor capital flow trends in emerging markets, particularly after U.S. trade data releases, as these will highlight the real-time impact of tariff adjustments. Expect possible volatility in USD/BRL as it reflects changes in investor sentiment driven by these economic shifts.
From the original
We examine how regions, such as emerging Asia and Latin America, are feeling the impacts US tariff policy. Plus, thoughts on how EM investors should consider adjusting their portfolios, and what to be on the lookout for in the months ahead. Featured is Alejo Czerwonko, CIO for Em
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