The past month has seen a lot of excitement surrounding the price development of crypto assets, which have lost a significant amount of value. International stock markets have also fallen from their recent highs. There have also been growing concerns about the increasing probability of a stock market crash.
I Am Surprised
Historically, stock market crashes have always been preceded by restricted liquidity. In most cases, significant interest rate hikes were required to achieve this. Curiously, in 2025, we were confronted with a series of interest rate cuts, some of which will continue into 2026.
Although quantitative tightening could have reduced liquidity, this was offset by larger fiscal packages, falling interest rates, increased risk appetite and higher bank lending. Overall, the global M2 money supply increased by around USD 10 trillion last year — roughly equivalent to the increase in the value of gold over the past two years.
Emerging Markets Have Recently Shown Resilience
If there were fears of a risk-off situation, emerging markets would be sold off mercilessly. So far, however, there are no signs of this. Despite turmoil on the capital markets, most EM currencies have remained relatively stable in recent weeks. The macroeconomic outlook for these countries remains favourable. Interest rate cuts in the US benefit most EM currencies, and some central banks, such as those in India and Indonesia, are already lowering interest rates. This is in line with the low inflation rates in these countries.
The West’s growing appetite for raw materials will increase demand for products from emerging markets, thereby generating more economic growth in these regions.
2026 Is Going to Be Exciting!
- How will the US deal with the USMCA? For Mexico and Canada, relations with the US are essential, yet both countries would be wise to free their economic relations from their unilateral dependence on the US.
- It remains unclear how the elections in Brazil will turn out, as it is still uncertain who will run against Lula. There are concerns that Lula will make costly election promises to secure his re-election, which would put the country under greater pressure in the long term.
While these fundamental political factors may generate some noise, I expect fundamentals to ultimately prevail, causing emerging market currencies to strengthen against the USD by the end of the decade (perhaps interrupted by a risk-off period in 2027).
There Will Be no Major Changes Until the End of the Year
I expect emerging market (EM) currencies to remain relatively stable until the end of the year. They could come under pressure against the euro if the US dollar weakens. However, I do not anticipate significant fluctuations in the EUR/USD exchange rate either. President Trump is under pressure on many fronts simultaneously though. This includes the Epstein files, the rejection in court of the prosecution of the former FBI chief and, presumably, the defeat over the customs policy he is pursuing. All of this could weaken the USD.
Even if Trump were to achieve peace in Ukraine, it would likely weigh heavily on the USD. The European Union, and Germany and Austria in particular, would benefit most if peace were to be achieved.
If everyone was sensible, Russia would soon be economically linked to the EU. Nothing reduces the likelihood of war more effectively than economic ties.
