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 closures.
Richard: Welcome back to Macro Minutes. Today is the 24th of February, 2026. My name is Richard Cochinos and Joining me is Abbas Kesvani, our Asia Macro Strategist, Daria Parkhomenko, our EMEA macro strategist and Luis Estrada, our LatAm Macro Strategist. We are here to talk about the Pulse behind Emerging Markets.
Now, after Friday's Supreme Court ruling and the update on Saturday, the President has signed a proclamation imposing a flat 15% tariff on all imports under Section 122 of the Trade Act of 1974. The new 15% uniform tariff under Section 122 replaces the targeted IEEPA regime with a simpler, temporary measure, capping tariff pressure at 13% effective rate for the US versus 17% previously under IEEPA. The USD weakness from the change is real but conditional, and the new regime creates both winners and losers. And that's what we're going to focus on today.
So my first question, pivoting to you, Daria, what does the US Supreme Court's ruling on IEEPA tariffs mean for Emerging Markets? And let’s focus on CEEMEA in particular.
Daria (Dasha): I think they're both short-term and long-term implications for EM. As you mentioned, the US effective tariff rate is now going to be lower by several percentage points than what was the case before the Supreme Court's ruling on the tariffs on February 20th. A lower US effective tariff rate should provide a temporary boost for EM growth, and subsequently, in aggregate it is a positive for EM FX. The other point to keep in mind is that by having a uniform tariff rate of 15%, and obviously there are some exemptions on certain products, and the USMCA exemption remains from Mexico, but by having a uniform 15% rate, it does reduce the dispersion in tariff rates across EM.
And that in particular, I think is going to be most beneficial to countries that have higher tariffs under IEEPA before the Supreme Court ruling than is the case now. And that would include the likes of Brazil, India, China, and South Africa. And if we're looking at specifically CEEMA, then South Africa should be a key beneficiary because they did have a rate of 30% for the tariff rate under IEEPA and now it implies a 15% tariff rate in place of that. So clearly it is a positive impact on the trade side for South Africa. Now, having said that, it is, I think, important to keep in mind that this is not necessarily a permanent environment for tariffs. Under Section 122, the 50% tariff rate is only in place for 150 days unless Congress approves an extension.
And there's also gonna be other avenues through which Trump can impose tariffs. And that includes the investigations that are already underway under section 232 and section 301. And on top of that, even though. I did mention that the latest outcome on tariffs is positive for EM in the short term, but there's also gonna be other drivers of currencies.
And in particular as we record this podcast, the US-Iran developments are a downside risk to watch for EM effects. If there is an escalation and if things do escalate on that front, then it will matter more for currency direction than the latest developments on US tariffs.
Richard: Thanks very much. Over to you Luis. What is our view on the impact of these tariffs rollback on Latin America?
Luis:I think Dasha was quite comprehensive on the framework on the short-term and the long-term effects of this tariff rollback. I want to drill down on two countries, Brazil and Mexico. Brazil was on the surface the biggest winner. The FD estimated Brazil saw the largest construction in their net tariff rate around 13%, which helped fuel REI's health performance yesterday. But there is a nuance. Only about 20% of Brazil's exports to the US were actually subject to these higher tariffs. 51% of them were exempt and some other 23% had a different reference for the tariff. So the FX reaction that we are seeing, it's in part sentiment, in part euphoria that is feeding from its fundamentals. And I mean, just look at IBOVESPA, it has outperformed NASDAQ by 20% in dollar terms over the last 30 days. So that is the case for Brazil.
In the case of Mexico, it's a different calculus. I think Mexico's story is different. It's not about the absolute tariff reduction which was estimated in 3%, making Mexico the fifth most benefited country. It's about the relative access to the US markets versus China. China was the number two beneficiary seeing a 7% reduction in tariffs. That means that the tariff gap between Mexico and China narrowed by 7%. Because remember, 87% of Mexican exports to the US are already at zero tariff on their USMCA. And given that China competes directly with Mexico in many manufacturing exports, these shifts, those materially benefit China and to a certain degree hurts Mexico.So bottom line, the takeaway is that it is supportive for the Reais on a relative optics basis and definitely adds to sentiment.
Richard: You bring up a great point about China. So I'm going to pivot towards you, Abbas, and ask you really a couple of questions about Asia. Look, we're coming up on March and I really would like to hear from your view why China's National People's Congress is so important.
Abbas: The National People's Congress is the juncture at which China will ratify its Five-Year Plan. Now, fiscal stimulus is not necessarily going to be part of the Five-Year Plan, but we might hear of the stimulus plan around the same time that the Five-Year Plan is unveiled. This would enable the government to reference stimulus in the Five-Year Plan. That stimulus announcement is one of the most important macro catalysts for 2026. It has the valence to rejuvenate the cyclical narrative for China and to attract foreign investors into the country's relatively cheap equities. That would drive the next leg lower and dollar CNH. And some of you'll be familiar with our bullish call on CNH, we have been recommending a bullish CNH trade since November 11.
Richard: Now, China might lower its growth target. Does this reduce the impetus for fiscal stimulus?
Abbas: It is possible that at this NPC, they might lower the growth target for China. Right now, the target is 5% and we've seen media reports indicating that it will be lowered to a range of 4.5 to 5%. But even meeting this lower growth target will still require some degree of fiscal stimulus. Keep in mind that net exports will contribute less to growth, given US tariffs, and investment in China is likely to be sluggish. So we are likely to hear of some additional government spending even if they lower the growth target.
Richard: And rounding out Asia, Dollar/Won, USD/KRW has seen a wild ride higher to almost 1,500. Why do we think the worst is behind us for the Korean Won?
Abbas: Well, first of all, your upside in Dollar/Won is limited. The authorities have shown us their hand in repeatedly defending around 1,480 in spot, and they can do this via the BOK selling dollars, but also via tactical hedging by NPS, which is the pension fund. But aside from authorities capping spot around 1,480, we actually have some catalysts for downside in Dollar/ Won, which is why we have this bullish recommendation.
On the bond side, Korea gets added to the WGBI bond index from April, which should result in seven yards of foreign inflows per month. Active investors will likely to front run some of this inclusion, so the inflows into Korea should start around now. And then on the equity side, the government is trying to encourage local investors to sell their foreign stocks and buy Korean stocks instead. We think some of the tax incentives being offered will be sufficient to attract local investors back into their home equity market, which has been performing very well as it is. So we do have a bit of a Goldilocks moment here for the Korean won, at least for the next few months. We have been recommending a bullish Korean Won trade since February 6.
Richard: Thanks for that, Abbas. And really back to you, Daria. The South African Rand has fallen down the ranks in EM since last month. Why don't you cover what has driven this and does this change your view on the Rand going forward?
Daria (Dasha): The short answer is that it doesn't change my view. In late January/early February, there was a big collapse in metal prices. And naturally as a metals producer and exporter, South Africa's currency sold off. And yes, the currency is vulnerable if the US/Rand situation escalates in the short-term, as I mentioned before. But I do think that fundamentally, I don't think the story has changed for South Africa. You have metal prices are still high, which is supportive for terms of trade for South Africa. And second, the domestic story I think overall remains constructive as well. And as we record this podcast, Finance Minister Godongwana is going to be presenting the 2026 budget on February 25. My expectation is that it will continue to show a path towards fiscal consolidation, which would be supportive for the Rand.
The one risk that I would flag on the political side, and there has been a number of questions on this, is that the leader of South Africa's Democratic Alliance announced earlier this month that he will not seek re-election as the party leader at the party's Congress in April. And the reason this is important is because the DA is the second-largest party in the ruling coalition. So it will be important to watch who's going to be the next party leader of the DA, as that can potentially carry implications not only for policy direction, but also political stability. And political stability has been one of the factors for why the domestic story has been constructive in South Africa, and thereby for the South African Rand.
Richard: And I'd like to pivot to you, Luis. Political events were anticipated to be a key driver for Latin America in 2026. Does this view still hold?
Luis: Yes, Richard, I think especially in Colombia, more than ever it is really heating up as the March 8 elections, the congressional elections are coming close. President Petro has really raised doubts about the process, how these will be working and how the votes will be counted, accusing the National Electoral Bureau, the CNE of trying to steal the election. These congressional elections are key ahead of the presidential elections, because the cohorts of politicians that will come out of it will be the ones that become very influential to the candidates and their capabilities to get votes in the presidential election in May.
So this is happening at the same time as the bonds are selling off. We've seen 150 basis points sell off on the 10-year cold test. The local bond market over the last month, it has broken above 13%, it reached 13.5% today. So there is a very delicate balance on the local markets. The Colombian Peso has been squeezed in liquidity, extremely hard to short, but it's still down 1% over last month versus the rest of the region that has gained against the Dollar. So bottom line, yes, political risks are very alive and escalating. I would highlight Colombia, but I would say that for Peru and Brazil, the pressure on elections will come closer as we approach April.
Richard: Okay. And I think to round up this discussion, Luis, one more question for you. Dollar weakness has exceeded expectations so far in 2026, and the BRL has had significant outperformance with over a 6% gain. What's your current assessment of Brazil from here?
Luis: Yes, Richard. We are very bullish BRL, which is now at 515. We're a little concerned about political volatility in the near future, but we have a year-end target of 500. That is 14% gain with a 7% in carry. So we are holding our positions, but we're implementing tail risk hedges, most recently a three-month seagull option that protects the 530 to 560 range. As I mentioned, this is an anticipation of political volatility, but we are very bullish, BRL.
Richard: That's great insights, everyone. For clients that would like to be on the distribution list of our EM Pulse publication, please reach out to your RBC sales representative or any strategist on this call. I am certain that we will return to these and related topics time and time again. So thank you to Abbas, Daria, and Luis for participating in today's episode. Please join us again for our next episode of Macro Minutes.
Speaker 6: This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or a solicitation, and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.