JPMorgan Caught Out by EM Currency Gains: It ‘Has Not Worked’

The bears at JPMorgan were left scrambling in Q1 2025 as emerging market (EM) currencies staged a comeback, defying their gloomy forecasts. While the bank’s strategists warned of a “sudden stop” in capital flows and a dollar-fueled rout, reality painted a different picture. Let’s break down why EM currencies roared back—and where to strike next.

The Contradiction: JPMorgan’s Bear Case vs. the Rally

JPMorgan’s team had bet big on EM currency weakness, citing U.S. tariffs, capital outflows, and a stronger dollar. They projected the Chinese yuan (CNH) to slump to 7.50 against the dollar—with risks to 8.00—as trade wars intensified. But here’s the twist: the U.S. dollar itself crumbled, dropping 2% in Q1. Meanwhile, EM currencies like the Mexican peso (MXN) and Brazilian real (BRL) surged, with the latter hitting a two-year high against the greenback.

Why the Bulls Won: Three Key Drivers

1. Dollar Weakness, Fed Hesitation:
   The U.S. dollar’s decline was the linchpin. While JPMorgan assumed the Fed would keep rates high, the central bank blinked. A narrowing growth gap between the U.S. and Europe—spurred by Germany’s $500 billion infrastructure stimulus—pushed German Bund yields up 40 basis points, while U.S. Treasury yields fell 30 basis points. This inversion sent the dollar into free fall.

2. Trade Winds Shifted:
   JPMorgan’s tariff doomsday scenario didn’t materialize. While the U.S. did slap tariffs on China, they were less punitive than feared—averaging just 5%, not the 10–60% JPMorgan modeled. Meanwhile, Mexico and Brazil thrived, their currencies bolstered by strong commodity prices (thanks to China’s slower, but still growing, demand) and fiscal discipline.

3. EM Resilience:
   Most EM economies had bulwarks JPMorgan underestimated. Countries like Chile and Colombia had fat foreign exchange reserves, while India’s tech exports and Poland’s manufacturing boom insulated them from capital flight.

The Winners—and Losers—So Far

• Big Gainers:
• Mexican Peso (MXN): Up 8% against the dollar, backed by a trade surplus and President López Obrador’s tax reforms.
• Brazilian Real (BRL): Gained 7%, fueled by iron ore exports and rate cuts from the Central Bank of Brazil.

• South African Rand (ZAR): Up 5%, as platinum and gold prices soared.

• The Laggards:

• Chinese Yuan (CNH): Did dip to 7.45 against the dollar—close to JPMorgan’s 7.50 target—but held above 7.50 thanks to the Fed’s dovish pivot.
• Turkish Lira (TRY): Slumped 3%, as inflation stayed sticky at 12%.

Where to Bet Now

JPMorgan’s misstep is your opportunity. Here’s how to play this:
1. Overweight EM Currencies with Strong Fundamentals:
- Colombian Peso (COP): Colombia’s tech-driven GDP growth (4.2% in 2025) and low external debt make it a hidden gem.
- Indonesian Rupiah (IDR): Indonesia’s $200 billion infrastructure pipeline and a current account surplus could push it to 16,000/USD from 16,500.

1. Avoid the “Fragile Five”:

2. Turkey, Argentina, and South Africa still face inflation and debt traps. Stick to high-yield bonds in these markets only if you’re a risk junkie.

3. Use the Dollar’s Weakness as a Lever:

A weaker dollar = cheaper EM stocks for U.S. investors. Pounce on Mexico’s autos sector (e.g., Grupo Salinas) and Brazil’s agribusiness (e.g., JBS SA).

Conclusion: EM’s Comeback Isn’t Over

JPMorgan’s Q1 misread was a classic case of underestimating market resilience. The dollar’s retreat, moderate tariffs, and EM’s policy buffers have created a sweet spot for currencies like the peso and real. But don’t get complacent—U.S. inflation and Fed policy could still turn the tide. For now, though, the EM bulls are in charge.

Final Stat: EM currencies are up an average of 4% against the dollar in Q1—double what JPMorgan’s models predicted. Time to ride this wave, but keep one eye on the Fed!

Invest smart, invest bold.