- The Thai Baht is currently deemed to be the most overvalued currency worldwide, according to modelling from Deutsche Bank.
- Of the majors, the New Zealand dollar is seen as the most expensive with the Canadian dollar the cheapest.
- Deutsche says its model has “significant predictive power for FX, both in terms of directional accuracy and the magnitude of moves, especially over longer-term horizons”.
Buy low and sell high is a basic principle in investing, including in currency markets.
But how do you tell what currencies are cheap and what are expensive? And, more importantly, what’s likely to happen in the future?
Well, we may have something of interest for the currency traders and longer-term investors among you.
According to Deutsche Bank, the chart below has “significant predictive power” for what currency markets are likely to do next, especially over the longer-term.
A Nostradamus for currency markets, of sorts, combining two of Deutsche Bank’s currency valuation models to determine what’s cheap and what’s not at present.
And all in visual form, too. Very spiffy.
So we know what you’re asking — how does it determine current valuations?
By combining its capital-based valuation and trade-based PPP (purchasing power parity) models together, Deutsche created the appropriately-named Cap-PPP model, shown above, to provide a better picture on what currencies are expensive and what are cheap based on both metrics.
“A more complete picture of valuations is hence obtained by combining both models, which we do to produce an ‘overall’ weighted valuation, using weights that reflect the relative importance of capital and trade flows for each currency,” it says.
Deutsche says the model has “significant predictive power for FX, both in terms of directional accuracy and the magnitude of moves, especially over longer-term horizons”.
So how do you read the chart?
Basically, the further out from the centre the black line sits, the cheaper a currency is deemed to be, and vice versus.
Based on the latest valuation snapshot, the Thai Baht is deemed to be the most expensive currency of all those tracked by Deutsche, edging out the Chinese yuan, Czech Republic koruna and South Korean won in April.
At the other end of the spectrum, the Turkish lira, Mexican peso and Philippines piso were deemed to be the cheapest currencies last month.
For the majors, the New Zealand dollar is the clear standout in terms of overvaluation. The US dollar, euro and Japanese yen are also seen to be a little expensive at present.
In contrast, the Canadian dollar, Norwegian krone, British pound, Swiss franc and Australian dollar are all deemed to be cheap based on the latest scoring.