Morgan Stanley: The Commodity Currencies Will Get Crushed

Which currencies might have the most to lose should the dollar-bounce continue?

According to Morgan Stanley’s currency team, two major commodity-backed currencies, the Australian Dollar and Brazilian Real, appear particularly overvalued against the dollar right now. 

Morgan Stanley’s Spyros Andreopoulos: BRL remains heavily overvalued against the USD: even if our models are somewhat slow to incorporate the improved fundamental outlook for the currency stemming from the recent oil finds and the China pull, an overvaluation of 34% against the USD suggests that BRL looks stretched at current levels. (The China pull argument may also apply to AUD.)

Even though their valuation is based on rather opaque econometric models likely subject to substantial error, these are at least guidelines:

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(Via Morgan Stanley, FX Fair Values, Spyro Andreopoulos, 17 December 2009)

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