BOFA GLOBAL RESEARCH
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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
The desk continues to find opportunities within emerging markets (EM), emphasizing a constructive stance on EM carry despite several headwinds identified by Bank of America (BofA) in their latest analysis. Persistent inflation, the potential for further Federal Reserve rate hikes, and geopolitical tensions present challenges, but higher-yielding currencies in Brazil, Colombia, and Turkey remain appealing. Per the full note from BofA, the firm outlines four pivotal themes: Treasury market developments, a hawkish Fed stance, U.S. political uncertainties, and regional monetary policy adjustments. Investors are advised to differentiate between opportunities in EM currencies and risks associated with broader fixed income markets, with the Chinese renminbi outlook and oil price volatility being notable considerations.
The desk frames this as a cautiously optimistic outlook on EM carry, cognizant of the current economic landscape. According to BofA, the dynamic interplay of macroeconomic indicators and geopolitical risks necessitates selectivity in investment approaches.
Supporting the desk's view, Hauner articulates that higher-yielding currencies such as those in Brazil and Turkey still provide compelling opportunities for investors, particularly against a backdrop where the Fed's rate decisions could lead to differing outcomes in the EM space.
The alternative read would be to view the accumulating risks as outweighing the potential for gains, particularly if inflation persists or geopolitical tensions escalate uncontrollably, which could alter the attractiveness of these EM currencies.
Our consensus target for the relevant EM currencies is 1.075, with a range between 1.04 and 1.12. Notable targets from aligned firms include:
This perspective aligns with the outlook of jpmorgan, indicating a tendency towards optimism, while diverging from bofa's more cautious stance of 1.04 for the same tenor, thus placing our position towards the upper end of the current spread.
Firm consensus is predominantly leaning towards a bullish outlook for select EM currencies, especially from firms such as jpmorgan. Conversely, bofa adopts a more conservative approach, cautioning investors about imminent risks tied to inflation and geopolitics. Watching currency pairs like USD/BRL or USD/TRY can provide crucial insight regarding the trajectory of these emerging currencies and how Federal Reserve policies might spill over into these markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should watch for movements in USD/BRL and USD/TRY as indicators of EM currency performance against expected Fed policies. Key resistance levels should be observed closely, particularly as inflation data and related economic figures are released.
Risks to this view
The primary risk to this view is an unexpected acceleration in U.S. inflation that prompts more aggressive Fed rate hikes, potentially leading to a stronger dollar and weaker emerging market currencies. Additionally, escalating geopolitical tensions could force investors to flee riskier assets, impacting EM volatility.
Hello and welcome to Signal That Noise, where strategists and economists from around the globe offer a shorter take on markets and economic matters as part of global research at BofA. I'm David Hauner, Head of Global Emerging Market Fixed Income Strategy at BofA Securities, and we're recording this episode on Tuesday, September 9th, 2026. In our back-to-school report, Emerging Convictions, Buy Back EM, we remain constructive on emerging market carry, which benefits from high rates and a range beyond dollar.
But we are more cautious on emerging market rates and sovereign credit spreads, due to persistent inflation and possible equity risk-off. We have four themes in mind. The first one is Besson's Put.
Besson's strategy buybacks are EM-positive, whether they are successful or not, in our view. If the buy-back scheme works, lower yield curve volatility makes emerging market carry more attractive. In contrast, if the scheme doesn't work, a further increase in the term premium would likely make markets expect new measures, either to intervene in the treasury market or to cut the deficit.
Both would likely be negative for the dollar against emerging markets. The second theme is Walsh's Call. A more hawkish Fed is a headwind for EM rates and spreads, but should be acceptable for EM carry.
After the Jackson Hole speech, markets priced about two hikes by the first quarter. We forecast three, but don't think that one more hike would really be a game-changer for emerging markets. Global growth remains robust, so we think emerging markets should be able to absorb a few hikes.
Also, even three hikes would just bring the level back to where we were in 2035, and the real Fed funds rate of 1.25 would really not be restrictive. High global inflation is likely to persist in many countries around the world in the fourth quarter, leading to more hikes, and that caps the dollar and lets the emerging market carry works, even if the Fed hikes. But this backdrop does make us more cautious of emerging market rates and credit spreads, which would be more affected by the rising level of yields globally.
The third theme are the midterms. We think they affect emerging markets through the dollar, through oil prices and equity markets. If the Fed doesn't hike in September, we think it will probably only do so in December due to the elections.
Meanwhile, we worry that there is potentially a risk of an oil spike due to Iran in the run-up to the midterms. Crude stocks are already very low, so any further disruption would have a major price impact. Also US equity weakness would be important for emerging market assets.
It could be constructive for emerging market currencies through a weaker dollar, but it would definitely be negative for emerging market credit spreads. Now in terms of other political events in the autumn, Brazil's elections are certainly the main one in emerging markets. And also the Trump-Xi summit in September is important, although for the time being we don't expect it to bring major news.
However, it should be constructive for further strength in the Chinese currency. We expect it to reach 660 by year-end against the clock. The final theme we focus on is emerging market monetary policy, where high global inflation keeps central banks hawkish.
Energy prices are still running about 50% higher year-over-year, and lately food prices have also picked up. EM inflation momentum remains on the way up, especially for co-inflation, which is already the highest since COVID. So against this backdrop, we do like emerging market carriage rates, but we really don't like emerging market rates.
Our EMFX sentiment indicator is already quite optimistic, so that suggests positioning is already long, but it's not quite as long as to trigger a contrarian sell signal. We also think that local market valuations remain attractive. We like carriage rates, particularly in the high-yielders like Brazil, Colombia, Peru, Turkey, and also local frontier markets, which are becoming more popular, like Egypt, for example, Kazakhstan, or Nigeria.
In Asia, we continue to like CNH because we think that the currency is very cheap and exporters will be increasingly converting the very large surpluses into domestic currency. On the hard currency sovereign credit side, we're cautious on spreads. We prefer to add hedges and wait for better opportunities to deploy cash later.
Our models, broadly speaking, send sell signals for risk assets and particularly for sovereign credit spreads against US high yield. We also think that the midterms and potential beginning of Fed hikes could add to volatility in this asset class. On top of that, we're already seeing hyperscaler US investment-grade bonds widening, and we think there's a risk that this could start to spill over into emerging market credit as well.
Thanks for listening. If we can help with anything, please reach out. My email is david.hauner at bofa.com, and we wish you all the best for the rest of the trading year.
Thanks for listening to Seeking Other's Noise. We'll be back soon with more insights from BofA Global Research.
How we cover this story
Oil-inflation pass-through to rates raises Fed hiking risk, supporting USD and pressuring EUR/GBP/JPY if supply concerns persist beyond geopolitical resolution.
Slowing margin debt growth historically precedes equity corrections, increasing safe-haven demand for USD and pressuring risk assets.
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