Emerging currencies in the firing line amid Fed

Emerging market currencies were eyed by investors on Wednesday as weak oil prices, China's market pain and after the Federal Reserve left its interest rates unchanged.

After major EM currencies tanked on Tuesday, the Brazilian real gained more than 1 percent on Wednesday from a 12-year low. The Turkish lira remained near record lows and Asian currencies held around their lowest levels in nearly two decades.

Read MoreChina stocks take the lead in Asian markets recovery

A man walks past a board showing currency exchange rates in Moscow, July 28, 2015.
Sergei Karpukhin | Reuters

Weighing heavily on the outlook for EM currencies was the uncertain future path of U.S. monetary policy.

No "fireworks" in EM financial markets were expected after the statement, but currencies along with equities were likely to bear the brunt of any subsequent market stress, according to Capital Economics' David Rees, ahead of the release. And traders are struggling to find EM currencies in the region where they can be "long"— or buying a security in the anticipation that it will rise in value— as the outlook remains highly vulnerable to rising interest rates.

"Explicit statements about the future path of U.S. monetary policy have had the biggest impact on EM markets in the past. The rationale behind this is that expectations of tighter monetary policy tend to dampen appetite for riskier assets, such as those in the emerging world," said Rees, senior market economist at Capital Economics, in a note on Wednesday.

Read MoreWhat two Fed rate hikes could mean for markets

Rees said the "most obvious" example of this was the "taper tantrum" in May 2013 that followed hawkish comments from then-Fed Chairman Ben Bernanke.

According to Oxford Economics, EM currencies have been in a bear market ever since the taper tantrum.

The Turkish lira and the Brazilian real are the currencies most at risk of further weakness, the group said, along with the South African rand and the Russian ruble.

The ruble has lost around 4 percent against the dollar over the last week, plunging to near six-month lows, but picked up on Wednesday to trade around 58.80 after the Russian central bank said it halted its foreign exchange buying in order to build up the country's reserves.

"Since May 2013, our EM currency index has slumped by 19 percent. This is a comparable decline to that seen in the global financial crisis in 2008-09 albeit spread over a longer period," Oxford Economics' lead economist, Adam Slater, said.

Rees added that the Columbia was also vulnerable to further volatility.

"As evidenced in recent days, EMs that rely on short-term capital inflows to fund current account deficits will remain the most vulnerable to market volatility. Brazil, Turkey and Colombia stand out as the markets that are most likely to experience the most turbulence," he said.

Traders looking for opportunities in the space have been restrained by ongoing market weakness, said the head of CEEMA FX and rates strategy at Citi, Luis Costa. He is shorting (betting on further weakening) the ruble against the U.S. dollar and the Turkish Lira against the euro and the dollar.

Read MoreRupiah plunge: It's not just commodities

Costa said he usually tried to offset the cost of holding emerging market currency positions against the dollar with "long" positions—but in emerging markets these are now tough to come by.

"In general in emerging foreign exchange, it is very difficult to find solid longs because the asset class has been challenged by commodities, by the Fed, by the debasement of euro rates, so we have everything coming together - China is exporting deflation to the rest of EM, so it is a very challenging environment for foreign exchange in general," he said.