“Most EM currencies weakened against the dollar during the two bouts of global stock market weakness in the first half of August and the second half of September, and most recovered some of the lost ground in October and subsequently sold off against the dollar in November. As for many other risk assets, the strength and weakness of the EM currencies against the dollar is currently driven mainly by changes in market sentiment towards the prospects for the euro zone. We believe the risks of a meltdown in the euro zone are very real and see little reason right now to be short-term bullish about the prospect for the EM currencies.
The latest results from our currency valuation model are shown below.
The model doesn’t necessarily work well as a short-term trading guide, but it takes into account each country’s long-term relationship between the real effective exchange rate and the following variables: productivity growth, terms of trade changes and real interest rate levels.
The currencies that currently appear particularly cheap relative to the model estimates of “fair value” are those of Poland, Hungary, Mexico, Chile, Peru and five countries in non-Japan Asia: India, Taiwan, Hong Kong, Malaysia and Korea.
The currencies that look expensive relative to the model’s “fair value” estimates are those of Brazil, Russia, Venezuela, Philippines, Colombia and Egypt.”