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Dollar strength through January left a tough start to the year. In G10, only GBP, NOK and NZD were stronger versus the dollar, and the gains were modest. TRY was the best performer in EM, followed by CNY, HUF and TWD. But again appreciation was fairly subdued. EUR retreated from its early January highs around 1.23, and at 1.20 is now back around levels seen in late November. JPY weakness was more pronounced, as was SEK. For FX valuations, NZD and TWD remain significantly overvalued while NOK, and TRY became somewhat less undervalued. Below are the details. (We prefer to look at PPP and real trade weighted based valuation metrics as they have tended to be more reliable than BEER and FEER models).
In G10
- SEK, NOK, GBP and JPY remain the most undervalued currencies. Currently, we think GBP could be the most attractive buy. With Brexit behind us, markets will focus more the UK’s COVID recovery. On that front, the UK’s impressive vaccine rollout should support the currency. For the other undervalued currencies, high oil prices could keep JPY undervalued while it could support NOK. (Chart 1,3).
- On the flip side, NZD is the most expensive currency. However, in recent years it has tended to remain overvalued which suggests favourable structural forces are in play. Moreover, New Zealand’s world-leading COVID management could see it stay strong. (Chart 4).
- EUR/USD continues to trade around fair value (1.20, Chart 2) after a brief spike higher in early January.
In EM
- On a trade-weighted basis, TRY, BRL and RUB remain at undervaluation extremes. Ongoing weakness in BRL means this has worsened since December, whereas for Turkey the recent rally leaves the currency slightly less undervalued, but still the most undervalued in EM (Chart 5). As RUB and BRL tend to mean revert these remain as attractive value plays.
- On the expensive side, TWD stands out as the most overvalued currency at close to 20%. Historically, TWD has tended to mean-revert when the currency is 10% overvalued, but given the structural shift towards semiconductors we do not see valuation as a barrier to further gains (Chart 7).