Cheap or Expensive by Design Quantifying the Deep Misalignment of Asian Currencies

ASIA MACRO INSIGHTS WRITTEN BY Cheap or Expensive by Design? Quantifying the Deep Trinh NGUYEN Tel. Misalignment of Asian Currencies Booming manufacturing and AI hardware demand have boosted Dayeon HONG Asian trade and current account surpluses (CAS). This should Tel. strengthen local currencies, but East Asia real effective exchange rate (REER) has declined 40% since 2000 on a weighted average Haoxin MU basis. Take the example of China: between 2010 and 2025, its GDP Tel. per capita rose from USD 4,630 to USD 13,866, and its net international investment position (IIP) grew from 15.2% to 20.1% of With contribution from: GDP (over USD 4 trillion), yet the renminbi has stayed flat at 6.72 Jeremy JI versus the USD as of late. Conversely, current account deficit (CAD) economies such as Indonesia, India and the Philippines have seen their exchange rates move with deteriorating balances. To assess these misalignments, we apply two valuation models to quantify the fair value of Asian FX. The first is the mean-reverting Purchasing Power Parity (PPP) model, which measures the deviation of the REER relative to its two-decade average. It reveals that the Japanese yen (JPY) is the most undervalued regional currency at 26% below its long-term average. The Korean won (KRW) is second at 14% undervalued, though 6.4% since August appreciation against the USD has narrowed this gap. The Indonesian rupiah (IDR) and Indian rupee (INR) are undervalued by 12% and 9%, while the Australian dollar (AUD) is 8% overvalued. The Behavioral Equilibrium Exchange Rate (BEER) model refines this by regressing real exchange rates against macroeconomic fundamentals: GDP per capita, Net Foreign Assets (NFA), and Terms of Trade (ToT). Over the past decade, emerging Asia led GDP per capita growth, while Singapore, Taiwan, Japan and South Korea held the largest NFA size relative to GDP. Even after factoring in these wealth dynamics and South Korea's improved terms of trade from AI hardware exports, the BEER model confirms that the KRW, IDR, INR, and JPY remain deeply undervalued, while the AUD appears heavily overvalued. Ultimately, domestic policy often decouples exchange rates from these strong fundamentals. JPY’s undervaluation is primarily a consequence of the Bank of Japan's deliberate low-interest-rate policy, and ripe for correction on rate hikes, the unwinding of Discover more of our research… structural carry trades, and potential domestic pension fund reallocation. The recent interventions by the BOJ, BOK and US … on research.natixis.com Treasury suggest that there is pressure for macroeconomic imbalances to be corrected. The rapid appreciation of the Korean won by 14.5% since July versus the USD point to the degree in which these misalignments can be rapidly corrected. Marketing communication: This document is a marketing presentation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and it is not subject to any prohibition on dealing C1 - P ublic Natixis ahead of the dissemination of investment research.

Trinh NGUYEN Asia Current Account Surplus Accelerates but FX Stays Weak Senior Economist, EM Asia Asian manufactured exports are powering world and even more so in the age of parabolically rising AI capex, which drives up demand for Asian hardware exports. Haoxin MU Trade surpluses have risen, pushing upward growth, GDP per capita and the current Economist, Asia Pacific account surplus (CAS). Such accumulation of savings would suggest a much stronger FX for CAS economies. But except for Singapore and Malaysia, and to a lesser extent Thailand and Taiwan, East Asian economies such as China, South Korea and Japan’s Jeremy JI currencies have remained weak. This is especially so when we consider the real Junior Economist effective exchange rate (REER) where the nominal effective exchange rate is adjusted for relative inflation of those economies versus the world (Chart 1 & 2).

Chart 1 Chart 2 Weighted average REER for current REER for current account surplus account surplus countries in Asia countries in Asia Weighted average REER CN SK TW MY Current account % of GDP (rhs) SG TH JP…