Macro Analysis /
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Updated alternative dataset showing currencies at risk of devaluation

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

  • Parallel proxy flags most overvalued currencies as ARS (c111%), ETB (c60%), NGN (c53%), DZD (c46%), and MMK (c38%)

  • Depreciation of the official exchange rate may be required for these currencies to contain external imbalances

Updated alternative dataset showing currencies at risk of devaluation
Tellimer Research
5 August 2022
Published byTellimer Research

At the end of March we created a “parallel premium proxy” using alternative crypto data to identify currencies that may be at risk of devaluation based on the existence of a significant 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 (see here for a full explanation of the methodology).

In short, we examine quotes on crypto trading platform Binance P2P for 61 emerging market currencies 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. In our experience, this simple proxy has tracked quite closely with other parallel market data for countries where such data is publicly available (like Nigeria).  

Given tightening global financial conditions and an associated rise in external imbalances in many emerging and frontier markets in the months since, we updated our dataset (as of 2:30pm EST yesterday). The results are presented below. As before, 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 and error and indicates that a parallel market does not exist.

Parallel proxies

We find a “parallel premium” of c111% for the Argentine Peso (ARS – up from c71% at the end of March), c60% for the Ethiopian Birr (ETB – up from c41%), c53% for the Nigerian Naira (NGN – up from c40% in March but down from a peak of c69% at the height of last week’s collapse), c46% for the Algerian Dinar (DZD – up from c40%), 38% for the Myanmar Kyat (MMK – up from c16%), 17.1% for the Bangladesh Taka (BDT – up from c6%), and c16% for the Laotian Kip (LAK – up from c12%).

All countries with a large parallel market premium at the end of March have seen the premium widen further except for Ukraine (whose premium has narrowed from c12% to c2%) and Sri Lanka (whose premium has fallen from c28% to c6% after devaluing the official exchange rate by c45%). The parallel premium has widened most sharply for the ARS, MMK, ETB, NGN and BDT, the latter of which has seen the possible emergence of a parallel market where one did not previously exist.

On the other end of the spectrum, the Russian Ruble (RUB) is the only currency that trades at a significant discount in the parallel market, rising to c48% from c25% at the end of March.

While this data should be taken with a grain of salt, it serves as a useful flag for which currencies may be overvalued and in need of further adjustment to contain external imbalances.

Note: The IMF’s annual external sector report was published yesterday, which provides a more holistic framework for currency valuation for 30 major developed and emerging market currencies. We will unpack this report in a future publication – see here for our summary of last year’s report).