The broad-based dollar rally is likely to continue in H2.  As a result, we believe EM FX will continue to weaken in the coming months.  However, we stress that divergences within EM will remain in place.  While EM FX as a whole will continue to be re-priced, we think idiosyncratic risks will lead to underperformance in the weaker EM credits. 

We recently updated our EM Vulnerability Table.  We think this is very important as it helps identify which countries are likely to suffer the most as global capital flows dry up.  For various reasons, the worst EM performers so far this year happen to have high external vulnerabilities as well as heightened political risk, which is a toxic mix when US interest rates are rising and the global backdrop is deteriorating.  Below, we focus on several EM countries that are likely to remain under pressure in H2.

Lastly, the brewing trade war provides a negative backdrop for EM.  The mainland China economy is showing some signs of slowing, and so a protracted trade war with the US would impact the growth outlook.  Indeed, global growth as a whole appears to be slowing and so EM is even more at risk of decreased global trade flows.

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