Research Team at Goldman Sachs, suggests that the EM FX looks to be fairly or slightly undervalued after more than three years of depreciation.
Key Quotes
“EM currencies, and concluded that valuations have moved into a supportive zone for the first time in several years.
Using our FEER model, we stress the baseline currency valuations for five risk scenarios. While the current signal for the 2-year-ahead EM FX performance from our suite of models is for stability, or even a slight appreciation, against the USD over the next two years, this valuation can be stressed by a number of risks. In particular, we consider scenarios involving (i) a China ‘hard landing’; (ii) capital outflows from the EM asset class; (iii) disappointing demand from G3 economies; (iv) less currency supportive cyclical policies in EM, and (v) even ‘lower for longer’ oil and commodity prices.
The stress tests suggest that persistent capital outflow pressures, coupled with a sharp slowdown in Chinese growth, can quickly erode valuation support for the CNY. Under such an adverse scenario $/CNY fair value can move to 8.3 relative to the current baseline level of a valuation of 6.1. By the same token, in a China hard landing scenario, we see further pressure on the currencies of Asian small open economies (SGD, MYR, KRW) despite their sizeable current account surpluses .
For the ZAR, TRY, BRL and PEN, the support from valuations is pretty fragile and, in a number of scenarios, they move to being significantly overvalued, both relative to the baseline valuations and current spot price levels. By contrast, the undervaluation signal for CEE, the RUB and MXN is fairly robust. Even in the scenario of lower for longer commodity prices, the FEER valuations for the RUB and MXN are not far from the lows recorded in recent weeks.”
