Wells Fargo's McKenna on EM FX, Trade Tariffs

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00:00We're seeing more significant pressure on these emerging market economies.

00:03Are there any of them that are more vulnerable potentially to these tariff threats,

00:08especially when you consider everything, not only country specific, but sectoral tariffs as well?

00:15Yeah, thanks for having me on, Sherry.

00:17Yes, I definitely think there are certainly some emerging market economies that are more vulnerable than others,

00:22especially the economies that are heavily dependent on exports.

00:24So I think a lot of the major Southeast Asian economies like the Koreas, the Thailands of the world,

00:30and then also Mexico.

00:31You know, Mexico has kind of been carved out of the tariffs for now,

00:33but, you know, we're starting to see some headlines come through that Trump is going to put some new tariffs on Canada

00:39and maybe some other higher baseline tariffs.

00:41So Mexico is still very vulnerable in that kind of backdrop as well.

00:46And, of course, the threats of 50 percent tariffs on Brazil.

00:50I mean, President Lula now coming out saying that Brazil can actually survive without trade with the United States.

00:55Is that true?

00:57I think that is true.

00:58You know, when you look at the trade linkage between the United States and Brazil, it's actually pretty minimal.

01:04You know, Brazil, Brazilian exports to the United States represent about 2.5 percent of Brazil's economy,

01:09so it's really not all that material.

01:1150 percent is a big number, so there will be some impacts.

01:14But the way we're kind of running the numbers now and thinking about things,

01:17Brazil is certainly not on pace to enter recession as a result of tariffs.

01:21Maybe there's some other things that could contribute to a Brazilian economic downturn,

01:25but tariffs will not be the primary driver of that downturn.

01:30President Lula also saying that Brazil is not necessarily obliged to use the dollar in order to trade.

01:35And, of course, we have seen significant pressure on the U.S. dollar in recent days

01:39and upside for emerging market currencies.

01:41Can this continue when, at the same time, you have, on the other side of that, the tariff threats on all of these countries?

01:47I think dollar depreciation is something that can continue.

01:52And I think there's a difference between dollar depreciation and de-dollarization.

01:56I don't necessarily think de-dollarization is happening, but we are in a period of dollar depreciation.

02:01I think when you think about the underlying drivers of the U.S. dollar depreciation,

02:06the Federal Reserve is getting ready to cut interest rates at a time when many of the other world central banks

02:10are at least at the end or pausing their easing cycles.

02:13And you're also looking at a U.S. economy that's probably going to be slowing down relatively significantly

02:18over the second half of the year.

02:19A lot of the major GZAN economies and also the emerging market economies

02:22are probably not necessarily going to experience the same type of downturn.

02:26So you're really getting two fundamental drivers on the interest rate and monetary policy side

02:30and then also on the GDP growth and the economic activity side

02:33that can probably push the U.S. dollar a little bit lower

02:36and at least support emerging market currencies,

02:38even though we're in a very contentious and maybe nearly hostile tariff backdrop.

02:43What is a broad trend when it comes to monetary policy across emerging markets,

02:48especially across LATAM?

02:50This morning we had Peru, for example, holding steady,

02:52despite the fact that we saw the pressure on the economy,

02:55perhaps moving the central bank to a cut.

02:57We know that these EMs have historically suffered from high inflation,

03:01which is why they have gotten ahead of those hikes in previous cycles.

03:06Where are we now?

03:08I think thematically emerging market central banks can continue to cut interest rates.

03:13You know, when you look at some of the recent decisions to keep interest rates steady,

03:17it was really as a result of geopolitical developments and maybe some swings in commodity prices,

03:21especially oil prices.

03:23But now that the geopolitical backdrop is steady,

03:25and again, the Federal Reserve is looking like they're getting ready to cut interest rates

03:28maybe as early as July.

03:30I think that, and you have a lot of emerging market currencies that are stable or strengthening at this point,

03:35that offers the central banks a lot of policy space to continue to cut interest rates.

03:38So even though you have Peru that's held steady tonight, you had Chile hold not too long ago,

03:44I think, you know, that Mexico is a lot of the emerging Asian central banks.

03:47You'll continue to see thematically lower policy rates and maybe easier monetary policy in general

03:52over the second half of this year.

03:54And it wouldn't totally shock me if you saw some more interest rate cuts in early 2026 as well.

03:59You mentioned the commodities space, and of course, a lot of these emerging markets depend heavily

04:05on those commodities exports, whether it's oil, agricultural goods, or copper.

04:10And we're seeing these sectoral tariffs as well.

04:12Are there any that stand out particularly to you that could perhaps have implications for the broader economy?

04:20I think the copper tariffs are really interesting.

04:23You know, Latin America is kind of, you know, specifically exposed to copper.

04:27But when, you know, when we're talking about policy space, higher interest rates, higher inflation,

04:32it really is a Latin American type of issue at the moment, where a lot of policy rates are extremely restrictive.

04:38But if you get copper tariffs, maybe that pushes inflation a little bit higher as well.

04:41So it wouldn't totally shock me if the copper tariffs pushed copper prices up relatively significantly.

04:46And this is something that we've seen over the last couple of days.

04:49And maybe that does offer a little bit more pause to some of these Latin American central banks

04:53that are still looking to cut interest rates.

04:55And maybe the economic slowdown is a little bit more pronounced in the short term.

04:58But again, I think thematically, you know, a couple of quarters out, early 2026,

05:03I still think a lot of these central banks in Latin America can continue to cut interest rates,

05:07even if copper prices are a little bit higher.

05:09It's just really managing the short-term volatility for the time being.

05:14How does China play into the emerging markets trade?

05:17Because, of course, we know that they're an economic pillar,

05:20whether it comes to trade relationships with these emerging markets,

05:23but also as the currency anchor at times for EMFX.

05:28Where does Beijing stand in all of this?

05:31Absolutely.

05:32Beijing and China in general is sort of the anchor behind EM.

05:36And, you know, when China sneezes, the rest of EM catches a cold.

05:38And it really just so happens to be that China is somewhat stable for the time being.

05:42We got a little bit of the trade truce with the United States not long ago,

05:45and it kind of seems like policymakers in China are more than happy keeping the currency stable

05:51and supporting broader financial conditions and economic activity for the time being.

05:55So if there is any anchor for support for emerging markets in general, but also EMFX,

06:01it actually is coming from China, which is a bit of a different narrative

06:04from where we stood at the beginning of this year when tariffs and trade tensions with the United States

06:08are really wrapping up.

06:10You know, and even over the last couple of days,

06:12China has kind of been excluded from a lot of the tariff rights

06:14and the more contentious trade rhetoric that's coming out of the U.S. administration.

06:18So, again, I think if there's any anchor for stability for EM,

06:22it actually is China for the time being.

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