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Why emerging market currencies are collapsing

Emerging market currencies are falling like dominoes.

The latest is the Kazakhstan tenge, which tumbled more than 20 percent Thursday against the dollar after the Central Asian country said it would adopt a free-floating currency policy. On Wednesday, Vietnam devalued its currency for the third time this year.

"Over the last several years, we've had a bit of a love affair with emerging markets," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, which was spurred by global growth, commodity prices, low interest rates and a weak U.S. dollar.

But with commodities prices dropping, an economic slowdown in China and the prospect of a rate hike in the next year, emerging markets have fallen out of favor, Chandler said.

Earlier this month, China allowed its currency to devalue, sending the yuan down about 2 percent against the dollar. Currencies in other emerging market countries such as Turkey, Russia, Malaysia and Brazil have also plunged this year.

Read MoreWhy another China devaluation could be coming

Motorists pass by the Saigon Notre-Dame Basilica in Ho Chi Minh City, Vietnam.
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Motorists pass by the Saigon Notre-Dame Basilica in Ho Chi Minh City, Vietnam.

Chandler said the selloff in currencies comes from foreign investors and emerging market companies that borrowed U.S. dollars while interest rates were low, and are now facing a "currency mismatch" paying the money back as the greenback rises.

However, he said the drop isn't worrying him just yet, and the devaluations are part of adjusting to slowed growth and lower oil prices.

"The weakness of their currency is ultimately going to be part of the solution, not part of the problem," Chandler said.

But Claudio Irigoyen, head of Latin American foreign exchange strategy for Bank of America, said uncertainty surrounding China's economic growth and an impending rate hike could send emerging market currencies even lower, especially as growth estimates and commodities prices continue to fall.

"It seems we still have some room to roll," he said.

Boris Schlossberg, managing director at BK Asset Management, said this could be the start of a currency war, in which countries compete to devalue their currency against others to boost exports.

Read MoreCurrency wars: Who's next to pull the trigger?

"It all depends on how well China can stabilize its own economy right now," Schlossberg said Thursday on CNBC's "Trading Nation." "If the economy just doesn't pick up and they have to devalue further, you could have all the telltale signs of a currency war starting."

In U.S. markets, stocks will have very little exposure to the emerging market turmoil, said Erin Gibbs of S&P Capital IQ. Instead, she said the biggest threats lie in China's slowdown and depressed oil prices.

"For the S&P 500, only about 25 percent of revenues come from outside the U.S. at all," she said, also on "Trading Nation." "When you break it down, there's almost none for emerging, and almost all those revenues are from developed [markets]."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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