- The Chinese yuan 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 Swedish krona the cheapest.
- Deutsche says its Cap-PPP currency valuation model has “significant predictive power for FX, both in terms of directional accuracy and the magnitude of moves, especially over longer-term horizons”.
If you’re scratching around for your next currency trade, or looking to invest abroad, the chart below may be of some interest to you.
It’s Deutsche Bank’s Cap-PPP currency valuation model, a visual indicator on what currencies it deems to be cheap or expensive right now based on capital and trade flows.
By combining its capital-based valuation and trade-based PPP (purchasing power parity) models together, Deutsche says it provides a more complete picture of valuations, using weights that reflect the relative importance of capital and trade flows for each currency.
It believes 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 in May, the Chinese yuan is deemed to be the most expensive currency of all those tracked by Deutsche, edging out the Thai Baht, South Korean won and Czech Republic koruna.
At the other end of the spectrum, the Turkish lira, Mexican peso and Colombian peso were deemed to be the cheapest currencies last month.
Of the majors, the New Zealand dollar is the clear standout in terms of overvaluation at present. The US dollar, euro and Singapore dollar are also seen to be on the expensive side of the ledger.
In contrast, the Swedish krona, Canadian dollar, British pound, Norwegian krone, Swiss franc and Australian dollar are all deemed to be cheap based on current ranking order.
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