KUALA LUMPUR – DBS Group Research has ranked the Malaysian ringgit as the cheapest currency within the basket of Asian ex-Japan currencies, followed by the Indonesian rupiah and Chinese yuan renminbi.
In a research note released on August 3, its foreign exchange and credit macro strategist Chang Wei Liang said the range of over- and under-valuations based on the equilibrium exchange rate (DEER) strategy was “much starker, with the ringgit’s under-valuation looking very sharp at -13.7% but [with] persistent risks from Covid-19 infections and political uncertainty weighing on sentiment”.
“The Philippine peso, Thai baht, and Indian rupee are ranked as the most expensive. The baht’s over-valuation remains quite sizeable, even though it has depreciated significantly and is Asia’s worst-performing currency on a year-to-date basis,” Chang said.
Meanwhile, the DEER strategy recommended long positions in the Japanese yen, pound sterling and Canadian dollar (CAD) on top of short positions in the US dollar, Swiss franc, and the euro.
Chang said the CAD’s valuation, being supported by rising oil prices, contributed to an improvement in Canada’s overall terms of trade and now stood at its best level since June 2014.
“Give the New Zealand dollar (NZD) a miss,” Chang added.
DBS said its DEER strategy explicitly accounted for interest rate differentials and that making no recommendation on NZD was a calculated outcome, having factored in the likelihood that returns from the mean-reversion of NZD’s valuation may not offset the higher NZD carry costs over the expected lifetime of the trade.
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