The emerging market banks that can best hedge equity investors' currency risk
The USD index has risen by 5% so far this year. Comparing banks' net foreign currency position with the over/(under) valuation of currencies against their REER fair values allows us to identify banks offering the best hedging potential. Looking at the scatter plot below, the banks in the top-right and lower-left quadrants can help boost equity portfolio performance if these currencies normalise to REER fair value. For undervalued currencies, banks with net short foreign currency exposures could help give an additional boost to future currency appreciation. Hungary’s OTP and Taiwan's Sun Financial stands out on this basis.