At the same time, notice how the IDR has depreciated almost as much as the ZAR despite Indonesia's much narrower current account deficit and the orderly political transition under way there. The market is forecasting that Indonesia's deficit will narrow significantly this year, growth will remain strong and inflation should come down a bit – which should be a recipe for an appreciating currency. While the country did put a partial ban on mineral ore exports, it is opening up several areas to direct investment, and the relatively high yields on offer should continue to prove attractive to investors. I think IDR could be oversold at this point.
There are a few even bigger outliers: the KRW, the PHP and perhaps the RUB on the one hand, and the PLN and perhaps the PEN on the other. I would like to focus on the KRW and the PLN, the two most extreme cases, because I think there are particularly good opportunities there.
There are a variety of reasons why the KRW may have cheapened recently, but I'm not sure they are convincing: the Korean government has been pressuring the Bank of Korea for a policy rate cut; funds have been flowing out of the equity market; and in the background is the fact that China is far and away its largest trading partner. However, the Bank of Korea resisted the call to loosen, flows into the debt market remain strong, and the current account balance continues to improve despite the slowdown in China. It strikes me that in an environment in which the market is willing to pay a premium for sustainability, the KRW should be appreciating. It seems like a good buy.
The PLN on the other hand managed to appreciate vs USD despite a large current account deficit. Is this sustainable? The currency is already relatively cheap (69 percent undervalued relative to the dollar, according to the OECD). The economy is recovering, the economic data are improving, inflation is low but rising and some analysts expect rate hikes later this year. While the country still has a current account deficit, it has narrowed considerably over recent years (from 8.1 percent in 2008 to an estimated 2.6 percent this year). There seem to be good reasons why the PLN has outperformed and why it will continue to do so. I wouldn't try to outguess the market on this one.