Nomura: Dollar overvalued, Asian currencies undervalued as fund allocations and bond supply diverge

Which currencies have the largest valuation gaps?

Averaging four measures—macroeconomic balance, purchasing power parity, the real effective exchange rate and the productivity-adjusted real effective exchange rate—Nomura finds the dollar overvalued by 14.7% and the yen undervalued by 18.7%; Asian currencies are undervalued by 8.6% on average.
Among Asian currencies, the Indonesian rupiah and Indian rupee are undervalued by 18.0% and 15.5%, respectively, based on the average of the four measures, while the renminbi is undervalued by 9.5%. The purchasing power parity and real effective exchange rate data are as of September 2026; the macroeconomic balance exchange rate uses an earlier data window.

In currency allocations weighted by assets under management, the Indian rupee’s share rose from 8.5% in August 2026 to 10.1% in September, moving from an underweight of 1.5 percentage points to an overweight of 0.1 percentage points relative to the benchmark.
Over the same period, the renminbi allocation rose from 7.2% to 7.4%, remaining underweight by 2.6 percentage points relative to the benchmark; the Brazilian real allocation rose from 8.3% to 9.0%, while its overweight relative to the benchmark narrowed from 1.5 to 1.3 percentage points.
Currency allocation and regional asset allocation are different measures: the allocation to India as a region was 8.2% in September, an underweight of 1.8 percentage points relative to the benchmark, unlike the slight overweight in the rupee allocation.

Combined net supply of Chinese government and local government bonds fell from 2.354 trillion yuan in September 2026 to 1.963 trillion yuan in October.
In the forecast for South Korean government bond issuance, gross issuance in 2027 is 222.8 trillion won, above the 214.9 trillion won forecast for 2026; but refinancing also increases, and net issuance falls from 98.7 trillion won to 96.3 trillion won.
For India, Nomura expects gross central government bond issuance of 15.995 trillion Indian rupees in FY27, above 14.61 trillion in FY26; net supply after open market operations is expected to rise from 1.878 trillion to 12.332 trillion Indian rupees.

Nomura sets four sets of weights according to exchange-rate regimes and capital controls, using short-term debt, other liabilities, broad money and exports to estimate required reserves. Using data as of September 2026 or the latest available data, average adequacy in Asia is 83%, 125%, 102% and 148% under the four scenarios, respectively.
China’s adequacy ratio ranges from 50% to 141% under the four assumptions, while India’s ranges from 189% to 307%. Results for the same economy change with regime assumptions, so comparisons must also consider the weights used.

Nomura’s model uses the relative performance of equity and fixed-income markets in US dollar terms, adjusted for exchange rates, to estimate the direction of currency rebalancing that may arise as asset managers maintain target weights; the size of US markets and investors generally gives them greater influence on the signal.
Nomura prefers a basket of signals: backtesting shows better historical risk-adjusted performance, but weaker performance for the dollar-yen currency pair alone. Trading costs also erode returns; for example, the weighted basket’s historical annualized return falls from 0.66% before costs to 0.38% after costs.