The 'Achilles heel' of emerging markets could suffocate their currencies

Emerging market currencies have had a strong year so far.

Since January, the ruble is up 20% against the dollar, the South African rand is up about 9% against the dollar, and the Brazilian real is up about 16% against the dollar.

But further gains among EM currencies will basically depend on one thing: growth.

"Growth - the Achilles heel of EM FX. ... As long as EM growth remains weak versus developed markets, there should be an upward bias to USD-EM," argued a Societe Generale's Jason Daw.

"Near term signals about EM growth momentum (and relative to developed markets) are mixed, but if a significant and sustained turning point becomes clear, a more constructive stance would be warranted."

He notes that the Societe Generale economics team expects the EM-G10 growth differential to improve by just 0.2 percentage points in 2016, and by 0.3 percentage points in 2017. Plus, everyone's still feeling uneasy about China's future.

And on top of that, there are renewed worries about a US slowdown, which, if there actually was one, would be not great for emerging markets.

Again, here's Daw (emphasis added):

At the current juncture, cyclical indicators are mixed and are sending a less optimistic message on the next near term outlook. For example, while momentum in exports is improving, they are still contracting, and there is roughly an even split between countries experiencing an improvement and deterioration in industrial production and PMI's. A meaningful slowdown in US growth would aggravate an already tenuous EM growth situation and the associated risk-off price dynamics would be negative for EM currencies.

In short, don't hold your breath for any huge upswing in EM currencies just yet.