This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Broad dollar strength through September left most currencies weaker through Q3. In G10, AUD fared worst of all with the stop-start recovery from localized COVID lockdowns and vaccine rollout lagging most other developed economies. GBP also underperformed despite a hawkish shift from the BoE, with fuel shortages compounding Brexit-related supply disruptions. JPY was rangebound ahead of LDP leadership election-related weakness in late September, while the more hawkish central banks left NZD (1.2%) and CAD (2.2%) only modestly weaker versus the USD.
In EM, IDR, RUB, CNY, INR and TWD all strengthened against the USD, but only IDR was up more than 1% with the others essentially flat. For China this is remarkable given the turmoil in equity markets at the start of the quarter and more recently the property market stress around the likely restructuring at China Evergrande. Latam currencies saw the most pronounced weakness in Q3 with CLP, BRL and PEN down between 9.3 and 6.5% for the quarter. Reviewing the past month, TRY is the worst performing EM currency triggered by the CBRT’s earlier than expected rate cut. Commodity-dependent COP and RUB are the two currencies both stronger on the month.
Valuations
FX valuations remain broadly unchanged over recent months with NZD and TWD still significantly overvalued. TRY and SEK undervaluation has become more extreme with a combination of global and country-specific factors. (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 undervaluation has become more pronounced in recent months and at around 40% is on a par with TRY. With a slowing global economy any near-term reversal is probably unlikely. JPY undervaluation also remains close to extremes and with oil climbing higher the yen could well remain under pressure. GBP and NOK also remain undervalued but less so than end Q2 (Chart 1, 2).
- NZD is again the most expensive currency on our metrics, albeit less so than three months ago. CHF and AUD remain the next most expensive in DM although with recent AUD weakness scaling back some of the earlier overvaluation. Notably both NZD and AUD remain overvalued despite COVID re-opening plans disrupted by efforts to maintain an unsustainable zero-COVID policy (Chart 3).
- EUR/USD continues to trade broadly around fair value despite the recent weakness.
In EM:
- On a trade-weighted basis, TRY and BRL remain at undervaluation extremes, and both are now cheaper than versus end August. RUB, however, has moved out of the bottom three and is replaced by COP which is now around 20% undervalued. BRL’s poor performance since July come despite 425bps in rate hike YTD and a likelihood of more to come. While for Turkey, the earlier-than-expected rate cut from the CBRT has further weighed on the currency leaving it now almost 40% undervalued (Chart 5). But with a lack of mean reversion it is not clear that TRY is yet an attractive value play (Chart 6).
- TWD remains the most overvalued EM currency according to our metrics and we think any further escalation in China-Taiwan tensions leaves TWD exposed. It is worth noting that the yuan looks broadly around fair value (Chart 7).
