China’s real effective exchange rate (REER) looks overstretched based on its relationship with the country’s productivity, while the Korean won (KRW) looks mildly undervalued, suggesting more upside potential, according to a new report by Standard Chartered Bank.
The bank analyzes Asian currencies based on real effective exchange rate, which is the weighted average of a country’s currency relative to an index or basket of other major currencies adjusted for the effects of inflation, as well as their relationship with productivity. It finds that Asian currencies are around 2.4% overvalued on a REER basis on average. If excluding Japan, Asian currencies are around 4.3% overvalued.
Within Asia, the Chinese RMB and Singapore dollar REERs have the highest Z-scores, at +1.82 and +1.54, while the Japanese yen (JPY) and Indian rupee (INR) REERs have the lowest, at -1.93 and -1.65, respectively.
That means the RMB REER (at 117.45) is 26.07% above its average since 1994, while the SGD REER (at 112.00) is 12.63% above its average since 1994.
Similarly, the JPY REER is currently -27.72% relative to its average, while the INR REER is -6.16% relative to the average.
This suggests that the RMB and SGD are overvalued on a REER basis, while the JPY and INR are similarly undervalued.