If you’re thinking about wading into the exotic world of emerging markets currency trading but not sure where to start, Deutsche Bank FX strategists Gautam Kalani and Jayant Gupta may have just what you’re looking – its new emerging markets FX scorecard:
According to Deutsche, it ranks 22 individual emerging market currencies from most to least attractive based on a number of factors generally considered important drivers of valuation.
“The first half captures 5 macro variables that tend to impact currencies over a longer horizon, while the second half captures 5 financial and technical variables that tend to impact currencies over a shorter horizon,” say Kalani and Gupta.
“We present a rank for each half of the scorecard calculated as the simple average of the ranks on the 5 individual components; the overall ranks for the macro half and the financial half are then averaged to produce the final EM FX scorecard rank.”
Based on the current scorecard, Deutsche believes that the Russian ruble, Malaysian ringgit and Indonesian rupiah are among the most attractive at present, or the “best longs”, as Kalani and Gupta put it.
At the other end of the spectrum, the least attractive currencies right now are the Chinese yuan, Indian rupee and Colombian peso.
In a separate post released earlier this week, HSBC’s emerging markets FX research team, led by Paul Mackel, suggested that emerging market currencies were either fairly valued or undervalued right now against the US dollar.
“Despite the rally year-to-date by EM currencies, we see little sign that they are overvalued against the USD at this point,” the bank said.
HSBC currently favours higher yielding currencies with positive domestic stories and undemanding valuations, such as the Indonesian rupiah and the Indian rupee.
It also suggests that low-yielding currencies with large current account surpluses – the South Korean won, the Thai Bhat, the Israeli shekel, and the Hungarian forint “are likely to stay relatively strong and help share the burden of effective appreciation with the reserve currencies”.