Most-Overvalued Emerging Currency May Be Set for Reality Check

(Bloomberg) -- The global hunt for yields has led Indonesia’s rupiah to be the world’s most overd emerging-market currency -- which is rather disconnected from its laggard performance in Asia this year.

With a policy rate of 4.5 percent, the rupiah is the most over-priced among the 22 currencies in Bloomberg’s EM bond index, based on the deviation of the spread between spot and purchasing-power parity rates from the year-to-date average. Yet, the currency has risen just over 2 percent against the dollar, the third-worst in Asia. Half the gains were chalked up this past week.

“For now, carry may be the dominant driver, but the scope for some correction later is on the cards given the valuation, the future of Bank Indonesia’s policy and a somewhat underwhelming growth performance,” said Rob Carnell, chief economist and head of research for Asia Pacific at ING Bank NV in Singapore.

The relative strength index for the dollar-rupiah rate has fallen to 28, the second lowest among the 22 currencies and is in an oversold territory.

Emerging currencies’ carry trades have returned 12 percent against the dollar this year.