The best opportunities for currency strength and outperformance exist in emerging markets – Wells Fargo

We continue to believe the best opportunities for currency strength and outperformance exist in emerging markets; however, we have become slightly less constructive in the short term. 

With the Fed tightening further and China's economy decelerating, we believe emerging market currencies can pause the current strengthening trend and hover around current levels through the end of this year. In fact, we would not be surprised if a sharp, but short-lived, sell-off across the emerging markets currency spectrum unfolded in the near future. This sell-off would likely not last long, and markets would re-focus on the fundamentals associated with EM currencies. 

While the global growth outlook may be peaking combined with select institutions considering policy rate cuts, the most attractive yield opportunities continue to be found in emerging markets. In our view, attractive carry, especially during times of subdued volatility in currency markets, can result in capital flows toward emerging markets, and combined with broad Dollar depreciation, can support developing currencies over the longer-term.