How Much Further Can Emerging-Market Currencies Weaken....

Pre economic crisis era is has been started, recently in emerging market, the currencies of Malaysia, Indonesia, South Africa, Turkey, Brazil, Colombia, Chile, and Mexico hitting record lows recently, forex traders and stocks investor, also currency traders around the world are asking: How much further can emerging-market currencies weaken? the essential question

There is a good article, according to Andres Velasco description, The standard approach to answering this question takes a relatively normal base year and measures how much a country’s currency has depreciated since then. That number is then adjusted for the inflation differential between the country and its trading partners. thats the point of view, If the resulting real exchange rate is not too far from that of the base year, the market is said to be in equilibrium, and little or no further depreciation should be expected. market damage is still going on and expand larger, safe haven currency no longer USD, maybe EUR or maybe CNY

Let see the different things, Now consider an alternative method. Take the same country’s current-account deficit and ask how large a real depreciation is needed (making some assumptions about trade elasticities along the way) to close that external gap. If the recent real depreciation achieves that threshold, no further change in the exchange rate should be expected. This is likely to very relevant for recent condition

So far these are the right answers, but to maybe this is the wrong question. Over the medium to long term, exchange rates are indeed driven by what happens in the real economy. growth or slow down. Or, more precisely, they reflect the requirement that the real exchange rate be such that the economy attains both external balance, But that need not happen until many months – perhaps years – after a shock. In the short run, exchange rates are driven by purely financial considerations. That is why they are prone to overshooting. Even small changes in fundamentals can have large effects on exchange rates, with up-front movements that far exceed what long-run adjustment requires. And the potential for volatility is particularly great if domestic corporations have large foreign-currency debts, which is true in all of the emerging economies under stress today.

These analysist according to recent condition of currency trading in emerging market, Consider the case of a hypothetical Latin American retail company that borrowed abroad in dollars to build a shopping mall at home. Such borrowing calls for collateral – in this case, the land on which construction will take place. The larger the value of the collateral, typically measured in domestic currency (or in an inflation-indexed unit, such as Chile’s Unidad de Fomento), the larger the size of the dollar loan.

Next, suppose that the price of the natural resource that is the country’s largest export suddenly dips sharply (as has happened recently). The exchange rate (both nominal and real) will depreciate accordingly, thereby setting in motion the standard, textbook adjustment process.
But in this case, a second, non-standard factor comes into play. After the depreciation, the collateral, valued in dollars, is worth less. Loan covenants have likely been broken, and lenders begin demanding that the borrower either put up new collateral or deleverage and repay part of the loan.

complete article can find on wef dot org Andres Velasco