The most undervalued and overvalued currencies around the world, in one chart

The Chinese yuan remains the most overvalued currency around the world, narrowly edging out the Swiss franc and Israeli shekel for that both coveted and unwanted title.

That’s the view of Gautam Kalani, currency strategist at Deutsche Bank, who says that many emerging market currencies are “significantly overvalued” based on three separate valuation metrics: purchasing power parity (PPP), Deutsche Bank’s behavioural equilibrium exchange rate (DBeer) and fundamental-equilibrium exchange rate (FEER) modelling.

To show how individual currencies currently rank, Kalani has produced this excellent chart showing the average of all three metrics.

Source: Deutche Bank

The black line is an average of the indicators, and the further out from the centre a currency ranks, the cheaper it is perceived to be. He’s even ordered them in a clockwise direction, moving from cheapest to most expensive.

Right now, emerging market currencies dominate the most expensive list, led by the Chinese yuan which continues to look the most misaligned on a trade-weighted valuation basis.

“Our preferred Behavioral Equilibrium Exchange Rate model (DBeer) suggests that the September exchange rate is significantly overvalued in TWI terms for Czech Koruna, Israeli shekel, Chinese yuan and Brazilian lira in emerging markets,” says Kalani.

“On the other hand, many emerging market currencies have undershot their DBeer equilibrium values, with the Malaysian ringgit, Taiwanese dollar, Polish Zloty, Turkish lira, Chilean peso, Colombian peso, Mexican peso and Peruvian sol all significantly undervalued.”

For developed markets, Kalani says that the Swiss franc is the most overvalued of all G10 currencies, while USD is deemed to be slightly overvalued. In comparison, he says that the British pound, Japanese yen and and Swedish krona remain undervalued on a DBeer valuation basis.

The Australian dollar is also deemed to be moderately overvalued on a trade-weighted basis.

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