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November was clearly a weak dollar month. In G10, NOK and NZD gained over 6% against the dollar while in EM, COP, BRL and TRY had similar moves. EUR, meanwhile, gained over 2% to touch 1.20, but JPY went sideways. For FX valuations, this meant that NZD and TWD went deeper into overvalued territory while NOK, TRY and BRL 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. We’ve seen that Brexit fears have tended to keep GBP undervalued, while higher oil prices keep JPY undervalued. But the current reflation theme could see SEK and NOK as the best value plays (Chart 1,3).
- On overvaluation, NZD is close to being 20% overvalued. Across all currencies this has tended to be a critical threshold. However, since 2000, NZD has consistently been overvalued without much mean reversion, so we would be cautious in fading NZD on valuation ground (Chart 4).
- EUR/USD continues to trade around fair value (1.20, Chart 2)
In EM
- On a trade-weighted basis, TRY, BRL and RUB remain at undervaluation extremes, despite their rallies in November (Chart 5). That said TRY has tended not to exhibit clear mean-reverting behavior (Chart 6). The others like BRL and RUB do, and so they would be the more attractive value plays.
- On the expensive side, TWD stands out as the most overvalued currency at close to 20%. Moreover, historically, TWD has tended to mean-revert when the currency is 10% overvalued, so it could be vulnerable to declines (Chart 7).