Real, Rupee to Slump as Flows Reverse: Morgan Stanley

By Candice Zachariahs

Oct. 10 (Bloomberg) -- The currencies of emerging economies including Brazil and India will slump as the U.S. dollar strengthens and investors pare back growth expectations amid signs of a global recession, Morgan Stanley said.

Brazil's real plunged 30 percent over the past three months, Poland's zloty is down 22 percent and India's rupee 12 percent as so-called carry trades are unwound and domestic importers and exporters reassess currencies. Slowing global growth will cut capital flows to emerging markets to between $400 billion and $450 billion from $750 billion in 2007-08, Morgan Stanley said.

``The violent sell-offs in some emerging market currencies in recent weeks mark only the beginning of what is likely to be a multi-month process,'' wrote a team of London-based Morgan Stanley currency economists led by Stephen Jen. ``We are likely to see a global EM currency `moment' in contrast to history, which is marked by regional currency crises.''

Brazil's real rose for the first time in seven days yesterday, closing at 2.2826 per dollar, after the central bank stepped up measures to stem the real's slide by drawing on its record $208 billion of international reserves to sell U.S. dollars for the first time in five years.

India's rupee fell to an all-time low of 49.26 per dollar today as tumbling stock markets prompted investors to take money out. The Bombay Stock Exchange's Sensitive Index tumbled more than 44 percent this year, wiping out all of 2007's gains. International investors have sold $9.8 billion more Indian shares than they bought this year, according to the Securities and Exchange Board of India.

Brazil, Philippines

Based on currency appreciation in previous years, Morgan Stanley says that emerging-market currencies including those of Brazil, the Philippines, Poland, Slovakia, Czech Republic and Turkey will be the hardest hit from local importers and exporters adjusting their foreign-exchange expectations.

``Intense trend appreciation'' since 2004 in the Brazilian real by more than 100 percent means that ``it is more likely than not that the locals are heavily skewed in their hedging positions,'' Morgan Stanley said.

Benchmark interest rates are 13.75 percent in Brazil, 16.75 percent in Turkey, 9 percent in India and 9.5 percent in Indonesia, compared with 0.5 percent in Japan and 1.5 percent in the U.S. Investors in carry-trades fund investments in high- yielding assets with funds from countries with low borrowing costs. The risk is that exchange-rate fluctuations can erase profits.

Currency volatility has increased over the past year as stock markets globally have tumbled. The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose above 60 yesterday for the first time to a record.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net