Macro Analysis /

Currencies at risk of devaluation based on alternative crypto data

  • Exchange rate versus cryptocurrency Tether, which is pegged to the US$, can serve as a parallel market proxy

  • Parallel proxy flags ARS as 70% overvalued, ETB, DZD, and NGN as 40% overvalued, and LKR as 28% overvalued

  • Devaluations may be required for these currencies to contain external imbalances

Currencies at risk of devaluation based on alternative crypto data
Patrick Curran
Tellimer Research
30 March 2022
Published by

In the wake of currency devaluations this month in Egypt and Sri Lanka, we attempt to identify currencies that may be at risk of devaluation based on the existence of a parallel market premium, which is oftentimes a clear, if imprecise, indicator that a currency is overvalued and/or suffering from FX shortages in the official market.

While some countries (like Lebanon and Argentina) have reliable parallel market data, others (like Nigeria and Ethiopia) have cracked down against parallel market data providers, and there are those (like Sri Lanka) that do not have a reliable data series but instead rely on anecdotal evidence to give a rough approximation of the parallel market exchange rate.

Fortunately, there are ways to proxy the parallel market premium. One is by visiting crypto trading platform Binance P2P and examining quotes against Tether (USTD), a cryptocurrency that is pegged to the US$. This provides a rough approximation of where a given currency may trade against the US$ in the parallel market, if such a market exists.

We calculate a parallel premium proxy for a sample of 60 emerging and frontier markets, defined as the latest bid quote (or an average of latest quotes if there is significant dispersion) divided by official currency mid quote on Bloomberg. We exclude countries with less than 3 quotes at the time the data was collected.

While this data should be seen as a rough approximation, in our experience it tracks quite closely with other parallel market indicators for countries where such data exists (such as Argentina, where the blue chip rate on Bloomberg – .AREQIMP G Index – which proxies the parallel exchange rate, closed at c191 yesterday versus c190 for our Binance P2P proxy).

That said, given the rough nature of the data and lack of liquidity versus the USDT for many of the currencies in question, we assume that any misalignment of less than 10% is within the margin of error and indicates that a parallel market does not exist. The results are below:

Parallel proxy

We find that the Argentine Peso (ARS) has a c70% premium, while the Ethiopian Birr (ETB), Algerian Dinar (DZD), and Nigerian Naira (NGN) all have a c40% premium. The Sri Lankan Rupee also has a c28% premium, despite the recent devaluation, though given the size of its external imbalances it is likely that the parallel market has temporarily overshot fundamentals.

Other currencies with a premium above 10% include the Myanmar Kyat (MMK), at c16%, and the Ukrainian Hryvnia (UAH) and Laotian Kip (LAK), at c12% each. Conversely, the only currency trading at a notable discount is the Russian Ruble (RUB), at c25%, indicating that the steep official devaluation may have overshot fundamentals.

Overall, our data highlights the ARS, ETB, NGN and DZD as the most overvalued currencies, suggesting that devaluations may be required for these currencies to contain external imbalances and bring more FX trading activity from the parallel to the official market.