The recovery in emerging market currencies is temporary and investors should sell on rallies and hedge against further weakness, said Stephen Jen (任永力), Morgan Stanley’s global head of currency research.
Interest-rate reductions by central banks around the world, liquidity injections and currency swap facilities may not be enough to ward off a global recession, Jen said in a research note on Thursday. Seven of the 10 most-active Asian currencies outside Japan strengthened against the US dollar this week, with South Korea’s won leading the rally with an 11.3 percent gain.
‘WORRIED’
“We remain very worried about emerging market currencies,” Jen wrote in the report. “Global fundamentals will continue to overwhelm country fundamentals and will be most emerging-market unfriendly as the world falls into a deep recession.”
Dollar shortage among local corporations, falling capital inflows to emerging countries and investors “re-examining” the prospects of economic growth will push currencies weaker, he said.
CURRENCY SWAPPING
In the past month, Iceland, Hungary, Belarus, Pakistan and Ukraine have approached the IMF for financial assistance. The US Federal Reserve also announced up to US$120 billion in currency swap facilities for Mexico, Singapore, South Korea and Brazil this week to ensure sufficient dollar liquidity. Central banks in the US, China, Hong Kong and Taiwan lowered benchmark interest rates this week.
Jen didn’t provide forecasts for currencies.
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