UBS FX strategists have projected that the Euro to US Dollar exchange rate (EUR/USD) could rise to 1.20 in a scenario where universal tariffs are set at 10% and tariffs on China are at 60%.
This forecast hinges on the expectation of a quicker decline in US growth and interest rates compared to Europe, as well as the possibility of increased risk premiums on dollar-denominated assets. The analysts noted that these factors are not directly beneficial to emerging markets (EM).
The current trend in currency markets has seen emerging market currencies appreciate by 3% against the US Dollar year-to-date. However, these same currencies have fallen by 6% when compared to the Euro. UBS analysts have indicated that the anticipated USD selloff differs from previous ones, which were driven by strong improvements in emerging market and developed market growth differentials and typically resulted in robust returns for emerging markets.
The analysis by UBS suggests that emerging markets may face several challenges ahead. These include weaker exports, broader global credit spreads, and an anticipated proactive monetary easing by emerging markets.
In light of these factors, UBS has recommended purchasing dips in Euro against emerging market currencies and Japanese Yen against Asian currencies (versus Singapore Dollar, Chinese Yuan, Indonesian Rupiah, Thai Baht, Colombian Peso, and Mexican Peso), expecting more significant movements in these pairs over the next three to six months than in short positions in USD against emerging market currencies.
Furthermore, UBS has identified the Brazilian Real, Turkish Lira, and Taiwanese Dollar as currencies that should outperform in the coming period. These insights from UBS analysts provide a strategic perspective on currency movements in the context of potential shifts in global trade dynamics and monetary policy responses.
