FYI | Nov 03 2008
By Chris Shaw
Just over a year ago Westpac Banking Corporation senior international economist Huw McKay suggested the changing economic environment where capital preservation, de-leveraging, repatriation and redemption were coming to the fore meant currencies of countries with current account deficits were most at risk.
This view has well and truly proven to be correct as those currencies have been harshly dealt with in recent months, to the extent McKay is now reassessing his model to see whether any of these currencies have now moved too far or not far enough.
His finding is that outside of the New Zealand dollar the commodity currencies have been sold off far more than the model predicted, high yielding currencies again with the exception of the Kiwi dollar have also been treated harshly on forex markets while European currencies have largely performed as expected.
At the same time, currencies in the emerging Asian region have fared reasonably well given the change in economic conditions, though McKay suggests part of this may be as a result of intervention by policy makers in the respective economies.
In terms of opportunities being presented by recent forex market movements and given current market conditions, McKay suggests there is value in the commodity and high yield currencies such as the Chilean peso, the Norwegian krone and the Australian and Canadian dollars.
All of these currencies fell around 5.0% or more than the model predicted, especially when compared to the New Zealand dollar, the Indian rupee, the Thai baht and the Philippine peso where the currencies have performed at least modestly better than expected.