Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why EM Currencies Are Crushing Stocks in June 2026
Transcript
- Lucas: So it's June 8, 2026, and the emerging market landscape this week has a weird, almost contradictory feel to it. Stocks are getting hammered—I mean, the EEM, the broad emerging markets ETF, is down nearly 7 percent in five days. South Korea's EWY has lost 13 percent. But here's the thing: the currencies aren't collapsing with them. Luna: Right, I noticed that too. The Chinese yuan is at 6.77 per dollar, basically flat. The Mexican peso is holding its ground. The dollar index actually ticked down a bit. Lucas: Exactly. The trade-weighted dollar is at 118.9, down from 119.03 a week ago. So we've got this bizarre decoupling happening. Normally, when EM stocks sell off this hard, you see a corresponding flight to the dollar and a sharp depreciation in local currencies. But that's not what's happening. Luna: So the question is, why? Is this a sign that the selloff is more about specific country stories rather than a systemic EM crisis? Lucas: I think that's exactly it. Let's start with South Korea, because that's the most dramatic example. EWY down 13 percent in a week. That's not a macro-driven EM rout—that's a Korea-specific shock. The political situation there has been unsettled for months, and there are whispers about policy missteps on chip exports, which is their bread and butter. Luna: Plus the headline today about Sam Bankman-Fried filing for a presidential pardon—that's creating uncertainty around regulatory spillovers, especially for crypto-exposed Korean markets. Lucas: Right, and Korea has a big crypto trading ecosystem. So that's an additional layer of idiosyncratic risk. But look at China: FXI is down 4.3 percent, BABA down almost 8 percent, Baidu down over 12 percent. That's partly the ongoing tech regulatory overhang, but also the yuan's stability suggests capital isn't fleeing in a panic. Luna: The yuan has been trading in a narrow band around 6.77 for weeks. The People's Bank is clearly leaning against any sharp depreciation. They want stability, especially with the trade balance still in surplus, albeit narrowing. Lucas: And that's the key difference between this selloff and, say, the 2013 taper tantrum or the 2015 EM rout. Back then, currencies collapsed alongside stocks because the driver was a global liquidity shock—the Fed tightening, the dollar surging. This time, the dollar is actually easing a bit. The Fed is on hold, and the trade-weighted index is slipping. Luna: So you're saying the selloff is more about country-specific political and regulatory risks, not a broad EM capital exodus? Lucas: Partly. But I don't want to overstate the decoupling. Look at Brazil—EWZ down almost 6 percent. That's a big move. And the real has weakened, though not as much as stocks. But the story there is different: commodity prices have softened, and there's domestic fiscal uncertainty. So even within EM, you have multiple, distinct narratives. Luna: That's what makes this episode's angle so interesting. If you're an investor, you have to decide whether to treat EM equities and EM currencies as the same asset class or as separate bets. Right now, the market is pricing in diverging outcomes. Lucas: Exactly. And that creates opportunities. For example, if you believe the Korean political crisis is temporary and the won is undervalued relative to where the equity selloff suggests, you might want to be long the won and short Korean equities as a pair trade. Luna: But that's a high-conviction trade. Most global macro funds are probably just reducing EM exposure across the board, regardless of currency nuances. Lucas: And that's the risk. If the selloff broadens and becomes a true risk-off event, the currency support could break. We saw that in March 2020: EM currencies fell hard once the panic became systemic. But today's environment is different. The dollar isn't surging, and global liquidity is still ample. Luna: Let's talk about the data. You mentioned EEM down 6.8 percent. VWO, the broader EM index, is down 4.5 percent. So there's a dispersion within EM itself. Large-cap China stocks are holding up a bit better than, say, Korea or Brazil. Lucas: Right, and India is actually the outlier. INDA is only down 1.5 percent. India's currency is stable, its growth story is intact, and it's less exposed to the geopolitical tensions that are hitting East Asia. So investors are treating India almost as a different asset class. Luna: That's the divergence within divergence. So the headline 'EM stocks are falling' is true, but it masks a lot of nuance. If you're a retail investor looking at an EM ETF, you're getting a blend of these very different stories. Lucas: And that's the core takeaway. When you buy an EM ETF, you're not making a single bet on 'emerging markets.' You're buying a basket of country-specific risks. And right now, those risks are uncorrelated in a way that's unusual. Luna: So what should listeners be watching? If the dollar stays weak and the Fed stays dovish, does that support EM currencies further and maybe even stabilize equities? Lucas: I think the key variable is whether the country-specific shocks—political instability in Korea, regulatory risks in China, fiscal concerns in Brazil—get resolved or escalate. If they resolve, you could see a sharp rebound in those markets, and the currency stability we're seeing now is a bullish signal. If they escalate, the currencies could eventually break. Luna: Honestly, if this conversation today has been worth a coffee to you, it would mean a lot if you could support the show. We keep this podcast ad-free and independent, and listener support is what makes that possible. There's a link: buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to say this kind of analysis is valuable to you. And it genuinely helps us keep doing it. So if you've gotten something out of today's episode, that's the link. Luna: Absolutely. And now back to the markets—one thing I want to explore is whether the yuan's stability is a deliberate Chinese policy signal or just a reflection of capital controls. Lucas: Great question. I think it's a mix. The PBOC has been using the daily fixing to signal stability, and they have the tools to defend the currency. But also, capital outflows from China have been relatively contained because the domestic economy isn't in crisis. Compare that to 2015, when there was genuine panic about growth. Luna: So the yuan's calm is actually a vote of confidence in China's economic management, at least for now. Lucas: Exactly. And that's why I'm more worried about Korea than China. The won has weakened, but not as much as stocks. The real risk in Korea is that the political crisis leads to a credit event or a downgrade. That could trigger a currency crisis. But so far, it's just equities pricing in a worst-case scenario. Luna: What about the Fed? Today's headlines include a rebound in S&P and Nasdaq, partly on chipmaker recovery and the Iran-Israel ceasefire news. If risk appetite comes back globally, that could lift EM equities too. Lucas: Possibly, but EM has become less correlated with US equities over the past year. The rise of country-specific factors has broken that simple beta relationship. So even if US stocks rally, EM may not follow unless the idiosyncratic risks recede. Luna: So the bottom line: for investors, this is a time to be stock-picking, not indexing, within EM. Lucas: Exactly. And to watch currencies as an independent signal. If a currency starts to crack, that's a red flag that the equity selloff could deepen. But if currencies hold, the equity rout might be a buying opportunity. Luna: Good note to end on. Thanks Lucas. Lucas: Thanks Luna. And thanks to our listeners. We'll be back tomorrow with another angle on the emerging market story.