Speaker 1:
Hello and welcome to Macro Minutes. During each episode, we'll be joined by RBC Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.
Richard Cochinos:
Welcome back to Macro Minutes. This part of the episode is recorded on the 23rd of January 2026, and the Asian portion is going to be recorded on the 27th of January 2026. My name is Richard Cochinos, and I am your host today. Joining me in the studio is Abbas Keshvani, our Asian macro strategist; Luis Estrada, our LatAm macro strategist; and Dasha Parkhomenko, our EMEA macro strategist. We're here to talk about emerging markets, EMFX, and introduce the EM Market Pulse, our new publication. First, let's turn to you, Abbas. Why don't you say a few words about what this product is, what clients can expect from it, and when should they expect it?
Abbas Keshvani:
EM Pulse is our new piece on emerging markets and it reflects RBC’s focus on EMFX. If you look at EM and need to catch up on block, EM Pulse is a short and snappy guide for you. Just a few pages is all you need. The piece is conveniently broken down into regional pages for Asia, LatAm, EMEA. And we at RBC have a dedicated strategist for each region. So you can zoom into the area that interests you most. And at the back of the page, you can find our trade recommendations and forecasts. You can typically expect EM Pulse in the third or forth week of each month.
Richard Cochinos:
My understanding is that each strategist is going to be covering a region, which Asia is definitely under your purview. And the CNY is the largest EM currency in the region. So my question to you is this, why are policymakers in China guiding the currency stronger?
Abbas Keshvani:
Well, the CFETS basket, which is how the PBOC measure the strength of the currency is not even 2% above where it was during the trough of China's zero COVID. So it's relatively speaking still a very weak currency. Now, the U.S. have always been very vocal about China, say, using its currency to allegedly propel their exports outwards, but now the EU is joining them with some of these complaints as well. And from China's perspective, given that they have a massive trade surplus of say $1.2 trillion, that's the number for 2025. They can afford a little bit of currency strength.
They could let the currency strengthen say 5%, but it would be better if they avoided a trade war. So the most economic thing for them to do for the PBOC to do is to really continue to guide dollar CNY lower. Now, keep in mind, China have had medium-term ambitions, and they still have these ambitions for CNY internationalization. A stable or appreciating currency is more likely to be adopted as a medium to transact and also to store reserves in. So overall, for policymakers in China, guiding the Yuan stronger is a great way to address external complaints of undervaluation as well as their own goals for currency internationalization.
Richard Cochinos:
We'll come back to Asia in a moment, but pivoting to EMEA, let's talk about South Africa and the ZAR. The South African Rand has had a good year last year, in particular in the second half of the year. Dasha, do you think this positive momentum can continue?
Dasha Parkhomenko:
Thank you, Richard. So the short answer to that question I think is yes. I do think that the performance that we saw last year in the rand can continue into this year. And from me, the way I look at is there's both external and domestic drivers that should push the rand higher in relative terms and also against the dollar. Now, on the local front, there's a few things that have happened that I think that are constructive for the South African Rand. First off, we have seen an environment where the fiscal outlook has shown signs of improvement. And even last year in November, we saw a credit rating upgrade for South Africa. Then secondly, we had the inflation target for the central bank lowered last year as well. And I think from a long run perspective, that should support investment and lower debt financing costs for South Africa.
And then also we've seen a stabilization in the energy supply and the political backdrop as well. And then coupling that with the external outlook, we've seen an environment where the terms of trade have improved for South Africa on the back of high metals prices, and that's most likely going to continue to run. And if we couple that with the view that Abbas described in China, that should be, I think, all constructive for the South African Rand. So if we put all of those factors together, then it does, I think, support our forecast for dollar-rand to trade down to 15 and a half in the medium term.
Richard Cochinos:
Perfect. Thank you very much. And to round out emerging markets, we're going to pivot to Latin America and Luis. FX carry and LatAm had a great run in 2025. Can it continue to outperform this year? And what would be the key drivers?
Luis Estrada:
Yes. Thank you, Richard. I think they can, but I think with more dispersion, the easy gains from dollar weakness are behind us yet carrying valuations still favor LatAm. As lightly weaker dollar, firm metals and wide real rate differentials remain supportive, 2026 is going to be more about the right stories and less about beta.
Richard Cochinos:
Growth globally is improving and the global credit impulse is improving in 2026. There's been a lot of speculation on Chinese fiscal stimulus. So Abbas, when can we expect fiscal stimulus to be announced? And a second follow-on question to that, how does the CNY backdrop tie in with the outlook for the rest of Asia?
Abbas Keshvani:
In terms of the timeline for fiscal stimulus, we're likely to get more information by March. The finance minister of China commented about fiscal stimulus in 2026 to 2030 as a window, and this is shortly before a committee meeting in which the five-year plan was discussed. All of that indicates that fiscal stimulus is being discussed as an accompaniment to the five-year plan, if not as a part of it. The next five-year plan should be approved around March. So we should hear something around fiscal stimulus around then. As it is, we are receiving information about stimulus in dribs and drabs. There are news reports that they were considering mortgage subsidies in China to encourage home buying. And the finance ministry said in late December that they're planning to boost consumption. So it does appear that they're working on some sort of fiscal stimulus, and the likelihood is that we will hear more information about this by March. And this is part of the reason why we remain bullish CNH because we really want to be positioned for that kind of fiscal announcement, which would drive dollar CNH lower the next leg.
Asia FX in particular exhibits a high beta to CNY. So an appreciating Yuan exerts a stabilizing influence over much of the region at the very least. At the very least it's stabilizing, at the very most, it could actually help appreciate those currencies. There's a few ways that this manifests itself. Firstly, there's the export channel. Because our view on CNH is partly predicated on expectations for fiscal stimulus in China, including consumption support, more aggregate demand from China boasts well for many of the economies of Asia, which tend to be exporter economies. So places like Malaysia, Korea, Taiwan, their currencies are primed to benefit from such a dynamic where China growth is perkier. Then there is the equity angle. An improved regional cyclical backdrop because of, say, Chinese fiscal stimulus is likely to result in inflows into local equity markets. Korea and Taiwan stand to benefit from this given chunky foreign positioning in their equities. I&R, on the other hand, could lose out from asset reallocation to China.
And then finally, there is the trade linkages angle. China is the biggest trading partner to most of Asia. This is why CNY has the largest weight in basically every major, near or nominal effective exchange rate current for each currency in the region. But on top of that direct trade linkage, China is also a notable competitor to many of the manufacturing economies of Asia. This means that if CNY is strengthening, other Asian currencies can strengthen without hampering their exports. So we see that central banks are more amenable to their own currencies appreciating if CNY is also appreciating. In terms of Asia's strategy, we just took profit on our bullish Thai Baht recommendation and we're looking to reenter later. In the medium term of the outlook for Thailand is good because of tourism. And we also remain bullish Taiwan dollar because of potential outperformance here from the conversion of Taiwan's AI windfall. Both these currencies, the Thai Baht and the Taiwan, like many others in Asia, have a high beta to CNY.
Richard Cochinos:
That's great. We've heard the positive story from Abbas and they're likely to be spillovers. So going back to EMEA and Dasha, when looking at EMEA currencies, are there risks to watch on the horizon for this view?
Dasha Parkhomenko:
Yes. Well, we have the typical risks such as potentially what if you had the risk of dollar strength or global risk off shock. But if we go back to what I was talking before on the South African Rand and the positive view that we have, there are going to be, I think, a couple of idiosyncratic risks that are worth watching going forward. The first one that we have in the very near term, the National Treasury, they're going to be presenting their next budget on February 25th, and that is going to be, I think, the next test for whether you have an environment of fiscal consolidation happening in South Africa. The second factor that I think will be important to watch, which is an ongoing factor is the relationship between South Africa and the U.S. Up to this point, we have certainly had a couple of different scenarios where there were tensions between U.S. and South Africa, but I think up to this point, the rand has actually been able to weather those bouts of tensions pretty well in the past year.
And then the last factor that I would also mention is I was talking about before that there's a pretty stable political backdrop at the moment, but there are going to be local elections taking place in late 2026/early 2027, the exact timing still has to be determined, but that is going to be watched in terms of how stable the coalition government is. And then also, I think that those elections are going to be viewed through the lens of them being a barometer for the national elections, which are not on the horizon in the near term, but do think that will be worth watching going forward as well.
Richard Cochinos:
So to zero in a little bit on Poland, what do you think in the Polish złoty here?
Dasha Parkhomenko:
I have a relatively benign view on the Polish złoty at the moment. If we were to look at our forecast profile, we do have a gentle drift higher in Europe Poland in the medium term, but I think in comparison to the price action that we've seen over the past year, it's nothing too aggressive and well within the range in Europe Poland in the past year. Now, in terms of what is driving the directional bias of our Europe Poland profile, is the fact that we expect a further narrowing in the rate differentials between Poland and the Euro area. We see the terminal rates for the National Bank of Poland being 3.5% in the first half of this year with potentially some downside risk to that terminal call. And if that's the case, then I think that should reduce some of the support to the złoty over the medium term.
But what I think will temper the drift higher in Europe Poland is that you still have an environment where the domestic fundamental story remains strong, and that should keep a lid on rallies in Europe Poland. So for example, if you were to look at Poland's growth relative to the rest of the CE3 region, it's expected to be the strongest for this year. You have fiscal policy that remains loose, and also the economy should continue to benefit from an ongoing absorption of the EU funds.
Richard Cochinos:
Excellent. Well said. Now, Dasha covered a couple of the risks in EMEA. Speaking of risks, there are a lot of elections in Latin America this year, Peru in April, Columbia in May and Brazil and October. Luis, what are the key dates to watch for FX investors?
Luis Estrada:
Richard, market cares less about election day and more about the early signals. The first and most important one I think is Colombia. March 8, congressional elections will matter ahead of the May presidential round. Secondly, in Peru, April 12th, when we will have their first election round, usually FX benign, but we can see surprises. Number three, very important. In Brazil, April, this is when we get the clarity of who's going to be running for presidential candidates, and this is something there's a lot of speculation around. And one more thing. I'm going to mention one that is not electoral, but it is very important in LatAm this year. It is July 1st when the USMCA renegotiation has a deadline to start. So these are the four dates that I think are key to keep in your calendar. March 8th, April 12th, April 1st, it's the first week, it's not exactly the first, and July 1st. Back to you.
Richard Cochinos:
So let's wrap this up on a positive note. And Luis, I'm going to come back to you with this question. Dollar max was below 18 and it was a great call in 2025. What's our preferred trade in Latin America in 2026?
Luis Estrada:
MXN remains structurally supported by liquidity and by carry, but the risk reward is no longer asymmetric. For 2026, we prefer high carry, cheap valuation trades. Our strongest conviction is dollar Brazil. And even though there will be elections, we believe volatility can be contained, allowing dollar Brazil to reach 500 by year-end.
Richard Cochinos:
That's great insights, everyone. And from me, congratulations on the EM Pulse and beginning what is certain to be a well-loved publication for RBC and for emerging markets FX strategy. For clients that haven't received a copy of this report and would like to, please reach out to your RBC sales representative and ask to be added to the new EM Pulse distribution list. I'm certain that we will return to these and other related topics time and time again. So thank you, Abbas, Dasha, and Luis for participating in today's episode. Please join us again for our next episode of Macro Minutes.
Speaker 7:
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