The High-Stakes Players in a Currency War

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The precipitous drop in the Japanese yen has grabbed the attention of the currency markets, but if you want to know who's really watching closely, look at what the neighbors are saying.

Japan's main trading partners have been transfixed by the currency's sudden swoon, not least because it has major implications for their export sectors. Not surprisingly, much of the talk about currency wars and competitive devaluation has originated in Asia.

The thing is, not everyone feels equally compelled to respond - and what currency investors really want to know is who is going to take steps in response to the yen's weakness.

(View more: How Low Can the Yen Go?)

Luckily, Christy Tan, an FX strategist at Bank of America Merrill Lynch, has some answers.

In Korea and Malaysia, "exporters are relentlessly calling for actions" on the won and the ringgit, Tan wrote in a note to clients. But Korea's transitional government is more likely to look at steps like amending the tax rules on banks' external debt, she says. In Malaysia, "reduced foreign buying in Malaysian equities could reduce support" for the Malaysian ringgit. As a result, Malaysian authorities have kept quiet, providing implicit endorsement of a weaker ringgit.

The picture is different in Thailand. Tan has looked at the nominal effective exchange rate for the baht, and she says that "one can safely conclude that there is greater impetus for the Thai authorities to act on THB strength relative to its trade competitors." For one thing, "the noises from exporters are loudest there," she says, adding that at the moment, the baht is unusually strong in trade-weighted terms and about eight percent above its historical average.

Emerging market currencies are highly illiquid and potentially quite volatile. But if you have the stomach for that kind of trade, you can now formulate a plan.

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