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Yuan, Lira Cheapest in EM FX Screen That Has Preceded Past Gains

Yuan, Lira Cheapest in EM FX Screen That Has Preceded Past Gains

(Bloomberg) -- For a currency investor looking for value in emerging markets, it might be best to avoid some of the top performers, and seek out the more neglected names.

Currencies ranked as cheapest on a monthly real effective exchange rate basis tend to show positive returns against the dollar more frequently than peers over the following year, according to a Bloomberg analysis. China’s yuan, the Chilean peso and the Turkish lira currently fall into that category, while the Thai baht, Indonesian rupiah and Indian rupee -- among the best-performing EM currencies over the past 12 months -- screen as expensive.

In the five-year 18 developing-country study, a currency was judged as cheap if it traded one or more standard deviations below its five-year REER average. Those currencies enjoyed positive returns against the dollar 71% of the time over the following 12 months, compared with 58% of the time on average and 50% for those deemed expensive.

CurrencyValueCurrencyValue
THB+2.7MYR-0.4
IDR+1.5BRL-0.5
TWD+1.3HUF-0.7
INR+1.3SGD-0.7
RUB+0.7CLP-1.1
ZAR+0.4COP-1.1
PLN+0.4TRY-1.1
MXN+0.3KRW-1.2
PHP0.0CNY-1.4
NOTE: Value is defined as the current standard deviation above or below the five-year average JPMorgan CPI-based real effective exchange rate.

Emerging-market assets have had a roller-coaster ride this year as the U.S.-China trade dispute began taking a toll on global growth, prompting central banks across the world to ease monetary policy. The MSCI Emerging Markets Currency Index has gained 1.4% so far this year, having been up as much as 2.5% and down as much as 1.5%.

NOTE: Simon Flint is an EM macro strategist, who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

To contact the reporter on this story: Simon Flint in Singapore at sflint18@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Cormac Mullen

©2019 Bloomberg L.P.