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The Emerging Market Currencies Most at Risk for Disaster

Monday, 31 Oct 2011 | 12:34 PM ET
John Block | Botanica | Getty Images

Phew! We made it through the latest European Union summit alive — and now it's time to look at where other disasters may be lurking.

Wondering how some smaller currencies would survive a market calamity? Here's one strategist's analysis.

Luckily, Dennis Tan, a currency strategist at Deutsche Bank, has sifted through balance-of-payment data for a slew of Asian countries, in an attempt to figure out which emerging-market currencies are best prepared to handle a new financial crisis.

"Continued deleveraging at global financial institutions could potentially cause a reduction in credit and capital flow into Asia in the coming year, though the recent bank recapitalization plans would possibly reduce the tail risk of another Lehman-style banking crisis," Tan wrote in a note to clients.

He found that the Sri Lankan rupee , the Indian rupee and the South Korean won are currently the most vulnerable, because their FX reserves would fall more than 50 percent under a scenario of severe capital outflows — and India's vulnerability has increased the most since 2008.

On the flip side, "Vietnam , Korea, and to some extent Taiwan have become less vulnerable since 2008," Tan wrote.

Should you trade on this situation now? Only if you think a major disaster is on the way. But it's worth keeping in mind. Be careful out there.

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