JPMorgan Upgrades Emerging Market Currencies to Market-Weight on Tariff Relief Hopes

JPMorgan Chase & Co. has upgraded its rating for emerging market currencies (EMFX) from "underweight" to "market-weight," citing investor optimism surrounding potential tariff relief and the possibility of a turning point in the U.S. dollar cycle. This shift in rating reflects a more positive outlook on the economic conditions and currency stability in emerging markets. The bank has also maintained an "overweight" rating for Asian currencies within the emerging market category, indicating a favorable view on the region's economic prospects and currency performance.

The upgrade to "market-weight" suggests that JPMorgan believes emerging market currencies are now more aligned with broader market conditions, making them a suitable addition to a diversified investment portfolio. This change in rating comes as investors are increasingly optimistic about the potential for tariff relief, which could boost trade and economic growth in emerging markets. Additionally, the potential turning point in the U.S. dollar cycle could provide further support for emerging market currencies, as a weaker dollar typically makes these currencies more attractive to investors.

JPMorgan's decision to maintain an "overweight" rating for Asian currencies within the emerging market category underscores the bank's confidence in the region's economic resilience and growth potential. This rating indicates that Asian currencies are expected to outperform other emerging market currencies, driven by factors such as strong economic fundamentals, favorable trade dynamics, and supportive monetary policies. The bank's positive outlook on Asian currencies is likely to attract more investment into the region, further bolstering its economic growth and currency stability.

JPMorgan's strategy team, including Luis Oganes, noted in a report to clients that their previous "underweight" stance on emerging market currencies had not been effective. They now believe there is sufficient reason to expect that emerging market currencies will not continue to weaken against the U.S. dollar in the coming stages. The bank also highlighted that the Chinese yuan is expected to remain stable for a longer period, providing support to other currencies in the region and acting as a stabilizing force.

Despite the upgrade, JPMorgan has maintained a "underweight" rating for emerging market sovereign and corporate debt. The bank cited that the current yield spreads are not sufficient to compensate for the higher risk of recession. The report also noted that while emerging market economies experienced a boost in growth in the first half of the year due to companies front-loading purchases ahead of tariff implementation, a significant slowdown is expected in the second half of the year.

JPMorgan has also maintained its prediction of a 60% probability of a U.S. economic recession in the second half of 2025. The bank forecasts that the GDP growth rate of emerging markets will decline from 3.4% in the first half of the year to 1.4% in the second half. The bank has abandoned its previous bearish stance on Asian currencies, reflecting a more optimistic view of the region's economic outlook.

In terms of specific currency positions, JPMorgan has maintained its short position on the Colombian peso (COP) and has ended its previous bullish recommendations on the Brazilian real (BRL) and Czech koruna (CZK) relative to the South Korean won (KRW) and Thai baht (THB).