Emerging market currencies have outperformed over the first few weeks of 2023. In a historical context, the early-year rally emerging market currencies are experiencing has only been beaten twice in the last twelve years. We can attribute this outperformance to a Federal Reserve that is likely to slow the pace of monetary tightening as well as the re-opening of China's economy. Going forward, we believe emerging market currencies can continue to outperform; however, the path ahead may be bumpy. Financial markets are priced for Fed rate cuts that may not materialize, while the optimism around China's re-opening is likely to fade in the second half of this year. Overall however, we believe the positives outweigh the negatives, and expect attractive yield opportunities in the emerging markets and improving growth prospects abroad should continue to encourage market participants to allocate capital toward the emerging markets and be a pillar of support for developing currencies going forward.
