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EMERGING MARKET CURRENCIES BRACE FOR TARIFF SHOCK

It's no surprise that U.S. "Liberation Day" is unlikely to be so jubilant for other assets - emerging market currencies, in particular, could be in for a "shock scenario," according to Wells Fargo.

Economists at the firm have identified key currencies that are at particular risk from a combination of U.S. tariff policy changes and local factors, highlighting the Chilean peso CLP= and Mexican peso MXN= as the most vulnerable pairs given lower forex reserves and higher political risks.

Wells Fargo sees a peak of 24.10 for the USD/MXN pair, which is currently trading at 20.34.

The Turkish lira TRYTOM=D3 is also at high risk for a shock event, as political risks increase following the arrest of opposition figure Ekrem Imamoglu, Wells Fargo says.

The Colombian peso COP= is also sensitive to a "shock" event if the government struggles to hit fiscal targets and if the central bank eases monetary policy at a quicker pace.

Colombia's central bank unexpectedly kept rates on hold at its Monday meeting. Wells Fargo thinks a selloff could see the peso fall as low as 4,791 per dollar.

On the other hand, the Chinese renminbi CNY=, Indian rupee INR= and Peruvian sol PEN= are likely more insulated from tariff shocks, Wells Fargo says.

Broadly, however, EM currencies are better positioned to weather a trade war than they were in 2018, Wells Fargo says, citing improved current account balances, attractive interest rate differentials, FX reserves and improved political risks in many countries.

Most EM currencies have managed to weather tariff-driven volatility well so far this year, with MSCI's index tracking them .MIEM00000CUS up 1.7% this year versus an over 4% loss in the dollar index =USD.

An index tracking Latin American currencies .MILA00000CUS has fared even better, rising over 9% year-to-date.

(Lisa Mattackal)

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