FX Valuations – SEK And RUB Look Attractive

Over August, there was pronounced dollar weakness, especially against NOK, AUD and CAD. This reduced NOK and CAD undervaluation, but increased AUD overvaluation (though it remains below the 20% extreme). In EM, CNH, MYR and MXN saw the biggest gains, while TRY and BRL moved deeper into undervaluation territory. 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 is the most undervalued currency. It has bounced off its undervaluation extreme, which suggests it could have further to appreciate (Chart 4). NOK and GBP are the other heavily undervalued currencies, though less so than before (Chart 1). The JPY remains stubbornly undervalued.
• NZD and CHF are more than 10% overvalued, while the AUD increases its overvaluation but at less than 10% (Chart 4).
• EUR/USD is now trading around fair value (1.20, Chart 2), while USD/JPY is still above fair value (90, Chart 3).

In EM

• TRY and BRL are heavily undervalued (Chart 5). That said TRY has tended not to exhibit clear mean-reverting behavior (Chart 6). However, RUB – the third most undervalued currency – does tend to mean-revert, so it could be an attractive buy (Chart 7).
• On the expensive side, HKD and TWD are hovering around the 20% overvaluation mark.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)