In a surprising turn of events, geopolitical tensions might be taking a backseat, and this could be a game-changer for emerging market currencies. But here's where it gets intriguing: despite the Iranian Foreign Minister Abbas Araghchi announcing a ‘general agreement’ on a nuclear deal with the U.S. during indirect talks in Geneva, skepticism lingers. The question remains: is this deal too good to be true? While the news has sparked hope for reduced war risks and eased sanctions, the modest drop in crude oil prices suggests the market is still hedging its bets. And this is the part most people miss: if this agreement does lead to warmer relations, it could significantly boost global sentiment and further strengthen the already impressive performance of emerging market (EM) currencies.
At MUFG, we’re optimistic about EM FX this year, forecasting notable gains for several currencies. Latin American currencies, particularly the Brazilian Real (BRL) and Mexican Peso (MXN), are leading the charge in 2026. But what’s driving this momentum? Here’s the controversial part: could President Trump’s election-year priorities actually benefit EM currencies? With mid-term elections in November, lowering the cost of living is a top priority. An Ipsos/Reuters poll revealed that 56% of respondents disapproved of Trump’s handling of this issue. Given that polls suggest Republicans might lose the mid-terms, Trump is unlikely to risk raising tariffs further—a move that could backfire. Instead, we expect fiscal stimulus in key economies like the U.S., China, Germany, and Japan to support global growth, alongside continued monetary easing in the U.S. and U.K.
But here’s the real kicker: inflation, or rather the lack thereof, is a silent hero for EM FX. Mexico’s annual inflation has stayed below 4% for most of 2025, the longest stretch since 2015-16 (excluding the COVID period). Similarly, South Africa’s inflation has been below 4% for the longest period since 2004-05. Low inflation in Chile, Brazil, and much of Asia is a significant draw for investors increasingly wary of inflation risks. This makes EM currencies even more attractive.
Our top picks for EM currencies this year include the South African Rand (ZAR) and Chilean Peso (CLP), both projected to gain close to 7% by year-end. The Malaysian Ringgit (MYR) and South Korean Won (KRW) are also set to rise by around 5%, supported by a recovering Japanese Yen (JPY) and steady gains in the Chinese Yuan (CNY).
FX and bond market volatility trends continue to favor EM FX performance, according to Bloomberg and MUFG Research. But here’s a thought-provoking question for you: as global markets navigate geopolitical uncertainties and inflation concerns, are EM currencies the safe haven they’re being made out to be? Or is there a hidden risk we’re overlooking? Let us know your thoughts in the comments—we’d love to hear your take!
