A significant disconnect exists between soaring precious and industrial metal prices and the currencies of the exporting EM countries. Despite nations like Chile, Peru, and South Africa seeing a major terms-of-trade boost, their FX markets have not priced in this fundamental improvement. This suggests a potential investment opportunity, as fundamentals are expected to eventually impact asset prices more directly.
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A paradox exists in emerging market FX positioning. Medium-term structural indicators show that the asset class is not over-owned, suggesting room for growth. However, short-term technical indicators are approaching an "extreme positive threshold," signaling a high risk of a near-term pullback, particularly in currencies highly sensitive to the global cyclical backdrop. This warrants a more selective investment approach.
Despite a constructive view on commodity currencies like the Chilean peso and South African rand, their respective central banks have recently announced reserve accumulation programs. This intervention acts as a direct headwind, making the currencies "stickier" and muting the speed and magnitude of potential appreciation.
A decoupling is occurring where EM high-yield currencies are outperforming DM high-beta currencies. Investors are increasingly using DM currencies as funders to capture attractive carry in select EMs like South Africa (precious metals), Mexico (stable carry), and Hungary (improving fundamentals).
A key relative value theme in FX is the widening gap between surging metal prices (gold, copper) and weaker oil prices. This creates a bearish outlook for oil exporters like Canada (CAD) and a bullish case for metal exporters like South Africa (ZAR) and Chile (CLP), amplifying a terms-of-trade driven strategy.
Despite investor nervousness after a strong 2025, EM currencies could appreciate against the dollar again in 2026. Analysts argue that the 14-year bear market has turned, citing historical precedent from the 2002-2010 bull market where consecutive positive years were common. This challenges the prevailing investor caution.
For investors looking to gain exposure to the precious metals rally within liquid emerging markets, South Africa is a standout. As a major precious metals exporter and energy importer, its terms of trade are rising sharply, making the rand a unique proxy for themes like the rise in gold.
Emerging vs. developed market outperformance typically runs in 7-10 year cycles. The current 14-year cycle of EM underperformance is historically long, suggesting markets are approaching a key inflection point driven by a weakening dollar, cheaper currencies, and accelerating earnings growth off a low base.
While broad emerging market currency indices appear to have stalled, this view is misleading. A deeper look reveals that the "carry theme"—investing in high-yielding currencies funded by low-yielding ones—has fully recovered and continues to perform very strongly, highlighting significant underlying dispersion and opportunity.
J.P. Morgan expects gold to continue rallying while traditional haven currencies like the Yen and Swiss Franc weaken. The firm notes that option markets are not priced for this divergence, creating a value opportunity for traders to position for gold's relative strength against these specific fiat currencies.
Despite strong price performance in commodities like copper and precious metals, the currencies of key EM exporting countries have not reacted as strongly as they should. This disconnect suggests that the 'terms of trade' theme is underpriced in the FX market, indicating potential valuation upside for these currencies.