The first 25 bp rate hike is expected in September, supported by the signals from the latest FOMC meeting in June. This reinforces the view of a stronger USD after the summer and general EM FX weakness.
Individual country characteristics will be more important going into the next year. The Fragile Five currencies excluding India will likely be the most vulnerable.
Brazil is in a worse condition compared to the tapering talks in 2013, implying the BRL could come under a lot of pressure if we are to see large outflows.
The TRY is vulnerable because the country's imbalances remain at about the same level as in 2013. Political risks have heightened following the June 7 general elections, which have yet to produce a government.
South Africa's current account balance and growth outlook have not improved much since 2013. Continued currency weakening is needed to restore external balance.
Reforms have been taken but slower than expected, so Indonesia still faces risk of large capital outflows ahead of the Fed lift-off.
India has shown remarkable reform steps since the taper tantrum. It is no longer considered one of the Fragile Five countries and should be less hurt by the Fed lift-off.
Fed lift-off will have negative but limited impact on Chinese and Russian currencies mainly through a stronger USD.
Mexico is probably the EM economy that will gain the most from the US recovery, with 80% of exports going there. This should take the pressure off the MXN ahead of the Fed lift-off, says Nordea Bank.
