The currencies set to weaken and strengthen in the period ahead, in one chart

  • 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 Canadian dollar the cheapest.
  • 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”.

If you’re wondering what currencies are likely to move the most in the coming years, we have something that may be of interest.

The chart below from Deutsche Bank shows current currency valuations, ranking both emerging and G10 currencies from the cheapest to the most expensive in February.

Source: Deutsche Bank

We know the question you’re asking — how should 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.

So how does Deutsche determine which currencies are currently overvalued and undervalued?

To answer that question, Deutsche recently created a capital-based valuation model, something it says was necessary given “capital flows have gained in importance [in determining valuations] over the past three decades”.

Combined with an older trade-based PPP (purchasing power parity) model, it created the 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.

Right now, the model says that the Chinese yuan is currently the most overvalued in the world based off those metrics, edging out other emerging market currencies such as the Czech Republic koruna and Brazilian lira.

Other emerging market currencies, such as the Turkish lira, Mexican peso and Colombian peso, sit at the other end of the spectrum, regarded as being the most undervalued currencies in the world right now.

For the majors, the New Zealand dollar is deemed to be overvalued, along with the US dollar and to a lesser degree the euro.

The Japanese yen and Australian dollar currently sit near fair value while the UK pound, likely hindered by ongoing uncertainty surrounding Brexit negotiations with the EU, is deemed to be undervalued.

The Canadian dollar, interestingly, is seen to be the most undervalued of G10 currencies right now.

For longer-term traders, or for investors buying overseas assets and considering whether to hedge your currency exposure, Deutsche says the Cap-PPP model has “significant predictive power for FX, both in terms of directional accuracy and the magnitude of moves, especially over longer-term horizons”.

Helping to support this view, and even with the rout that occurred beforehand, the model was suggesting late last year that the US dollar was still the most expensive currency of those the model tracks.

It’s now ranked as the eighth most expensive currency worldwide, according to the model, hinting that even with recent weakness there may be further declines to come.

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