Emerging Convictions Viewpoint: Warsh and peace

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Emerging Convictions Viewpoint: Warsh and peace

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Emerging Convictions Viewpoint

Warsh and peace

Peace was a red herring 22 June 2026

We think the hawkish Fed offsets the benefits from the Iran deal for EM. Fed hikes are GEMs FI Strategy & Economics

fine for EM when global growth is balanced, but it isn’t right now. The good news is that Global

global inflation surprises and US forward real rates have already spiked. However, in the David Hauner, CFA >>

run-up to Fed hikes we see risks as asymmetrically skewed to the bearish side, as Global EM FI/FX Strategist

investor positioning is still long EM on a structurally positive view and the expected MLI+44 (UK)20 7996 1241

benefits from an Iran deal. We maintain our cautious stance from Emerging Convictions david.hauner@bofa.com

- The stages of Iran grief: #3 (April 30). Raghav Adlakha

EM Quant/Sovereign Strategist

AI v EM: Fed is the referee MLI+44 (UK)20 7995 9019

We’ve been arguing for a while that AI is bullish for EM — unless it leads to higher US raghav.adlakha@bofa.com

real rates. With a dovish Fed, the risk boom and demand for commodities/chips were

positive for EM. However, now the AI investment drive is one reason why the Fed is

turning hawkish. And yet, ultimately tighter financial conditions would likely weigh on US

risk assets and USD inflows. The BofA Bull/Bear index is on “sell”. We think this caps the

DXY, and we remain structurally bullish EM—or at least after we have navigated the

inflation challenges of the next several months.

FX: carry still works

The bad news first: EMFX has low risk premium vs the USD, and higher US rates weigh

on low-yielding EMFX. The $/CNH consensus trade is vulnerable. The good news: EM

carry is high, fundamentals decent, and vol low.