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What to Do When Emerging Market Currencies Submerge

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All the grim economic news is battering emerging market currencies. Here's what to do.

Emerging market currencies like the Russian ruble, the Brazilian real and the South African rand are taking it on the chin today, thanks to Fed Chairman Ben Bernanke's gloomy assessment of the economy and the drumbeat of bad news from Europe. That means at some point, they will look attractive again. But don't hold your breath.

Rebecca Patterson, chief markets strategist for the institutional arm of J.P. Morgan Asset Management, is holding out for unexpectedly positive policy moves or better than expected economic data.

"Anecdotally, it feels like at least some central banks might be starting to fight back; that is, buying their currencies (selling USD) to provide some stability for broader local markets," she told me. "That is a good sign. But we still need to see positions cleared to a point that money managers feel better. I am not sure we are there yet."

Others are more bearish - a lot more. Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman, has compared the currencies' performance since August to their moves in 2010 and in 2008-2009, and he really doesn't like what he sees. Some samples:

--The Russian ruble is off 14%, beating its 2010 decline of 9% but not even close to its 37% drop in 2008-2009.

--The Brazilian real is off 18%, more than its 2010 drop of 10% but peanuts compared to its 41% decline in 2008-2009.

--The South African rand is down 19%, well below its 11% decline in 2010 but nowhere near its 42% drop in 2008-2009.

It's "way too early to think about a bottom, given that the euro zone end game is still a quarter or so off," he told me.

"We are moving into the 2009-type sell-off, though as you can see, the percentage changes now are still only the tip of iceberg. Bottom line: there is a lot of potential EM, or emerging markets, weakness ahead despite moves seen so far, so stay long USD vs. EM until further notice."

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