Emerging Market Currencies To Crash 30-50%, Jen Says
Less than 24 hours ago, we argued that although it might have seemed as though Brazil hit rock bottom in Q2 when it suffered through the worst inflation-growth mix in over a decade, things were likely to get worse still.
The country, which is also coping with twin deficits and a terribly fractious political environment, is at the center of what Morgan Stanley recently called “a triple unwind of EM credit, China’s leverage, and US monetary easing” and now that its most critical trading partner has officially entered the global currency war, all roads lead to further devaluation of the faltering BRL.
And it’s not just the BRL. As Bloomberg reports, former IMF economist Stephen Jen (who called the 1997 Asian crisis while at Morgan Stanley) thinks EM currencies could fall by an average of 30% going forward on the back of the PBoC’s move to devalue the yuan. Here’s more:
[The] devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil’s real to Indonesia’s rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen.
Volatility measures were already signaling rising distress in emerging markets even before China’s shock move. An index of anticipated price swings climbed above a rich-world gauge at the end of July, reversing the trend seen for most of the past six months.
“If this is the beginning of a new phase in Beijing’s currency policy, it would be the biggest development in the currency world this year,” said Jen, founder of London-based hedge fund SLJ Macro Partners LLP. “The emerging-market currency weakening trend is now going global.”
Latin America is a particular concern because of the region’s high levels of corporate debt, said Jen
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