Tue, Aug 18, 2015 - Page 14 News List

Morgan Stanley’s Fragile Five swells to Troubled 10

VULNERABLE:The New Taiwan dollar has been added to a list of currencies that Morgan Stanley said were at risk following China’s devaluation of the yuan last week


Forget the “Fragile Five.” These days, strategists at Morgan Stanley are worried about what could be called the “Troubled 10.”

That is how many nations they say are particularly at risk since China devalued the yuan. While the analysts have not used the term themselves, it is as good a description as any for the currencies — from the Brazilian real to Peru’s sol and South Korea’s won — which have trading ties making them susceptible to a slowdown in the world’s second-biggest economy.

“It’s all about vulnerability,” Morgan Stanley’s global head of foreign-exchange strategy Hans Redeker said.

“Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China,” he said.

Morgan Stanley was right about the Fragile Five. Those currencies include four of the developing world’s eight worst performers since the phrase was coined in 2013. The real, together with Turkey’s lira, South Africa’s rand, the Indian rupee and Indonesian rupiah, have suffered as rising global interest rates make it more difficult for the countries to finance their current-account deficits.

For Redeker, the biggest challenge now is a lack of global growth. While central banks in Japan, Europe and the US have rolled out record stimulus, the world’s economy will expand at the slowest pace since 2009 this year, according to IMF forecasts.

That “lukewarm” recovery means China will not be able to rely on exports to drive expansion, said the strategist, whose firm was the second-highest ranked forecaster of the dollar versus the yuan, according to data compiled by Bloomberg for the four quarters that ended on June 30. In turn, the slower growth is also expected to put China’s trading partners in the crosshairs.

There is some overlap between the “Fragile Five” and the new at-risk list, with the rand and real to be found in both. Also vulnerable to China’s slowdown are the Thai baht, the Singapore and Taiwan dollars, the Chilean and Colombian pesos, Russia’s ruble, the won and the sol, according to Redeker.

China is the top export destination for most of the countries on the Troubled 10 list, data compiled by Bloomberg show. The nation accounted for 37 percent of South Africa’s exports and 30 percent of South Korea’s in 2014.

Investors were jolted last week as China implemented the biggest depreciation of the yuan since 1994, raising concern that authorities plan to use a lower exchange rate to shore up the weakest growth in more two decades.

The move rippled through global markets, weakening the currencies of the Asian countries that compete with China for exports and sending developing-nation stocks into a bear market. A Bloomberg index tracking major emerging-market currencies, already under pressure from slowing growth and a slump in commodity prices, fell 0.9 percent last week to a record low.

“The move by China has introduced further concerns on foreign-exchange valuations in emerging markets,” Manulife Asset Management fixed-income trader Chris Chapman said.

“We have reduced our EM positions over time as the risk-reward profiles have changed, and will continue to monitor,” he said.

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