While the market focus is clearly on cryptocurrencies, conditions are steadily improving for EM FX. Constructive global backdrop including improved risk appetite and strong growth will send investors deeper into select EM currencies.
Current EM weakness triggered by the sudden steepening in the US yield curve will provide investors with attractive valuation heading into 2018. Weak US data and dovish comments indicate that the Fed is not positioning for aggressive tightening. India remains a bright spot for EM investors, as Q3 growth should recover and likely surprise to the upside. Domestic conditions including consumer spending and narrowing trade deficit will support acceleration in growth.
The RBI will likely stay on hold as inflation heads marginally higher yet tighter monetary policy is a low probability until late 2018 (markets are pricing in a single 25bp hike in 2018). Positive news around the UK /EU negotiations, which indicated that an agreement on an exit settlement would be widely positive for CEE. The UK is the second higher net contributor to the EU budget therefore a bigger exit bill will likely soften the impact the on EU budget near-term. Further positive news will be bullish for the PLN considering the currencies historical high sensitivity to Brexit related risks.