Nascent rally in EM currencies could run for some time, genuine turnaround unlikely yet

The prospect of further aggressive easing measures from the ECB combined with a more benign outlook regarding Fed rate hikes is buoying EM FX space. EM currencies and more so commodity currencies are showing decent gains over the last two weeks.

However, given that markets remain sceptical towards EM outperformance, the nascent rally could extend for some time and we could see potential for short term outperformance. That said this improvement is unlikely to be a genuine turnaround. Growth in both the developing and emerging markets remains well below trend and concerns regarding Chinese growth continue to linger.

"Structurally we remain bearish on carry trade dynamics (high volatility, poor liquidity and drawdown risk etc.) so we regard the recent improvements as an opportunity for tactical trading more than anything else. " said Commerzbank in a report.