Comprehensive Guide from Broker Elev8 on Relative Currency Valuation

In the world of Forex and Contract for Difference (CFD) trading, whether for G10 currencies or gold (XAUUSD), traders never operate in a vacuum. Every position is a relative bet: buying EURUSD expresses a bullish view on the euro and a bearish conviction on the US dollar. Therefore, fundamental analysis must be comparative to be effective. In other words, every fundamental assessment is inherently relative. Recognising this, broker Elev8 has developed a clear and easy-to-understand framework for relative valuation, combining five complementary fundamental lenses. The result is a concise ranking that highlights which currencies appear overbought or oversold, and which are overvalued or undervalued. Traders can use this information to identify high-probability pairs and gain a broader understanding of the forex map by leveraging six different quantitative pillars: overextension, oil correlation, secular performance, economic divergence, and effective exchange rates. Here is the analysis: Overextension analysis: historical range positions. Overextension analysis measures how far a currency’s exchange rate has moved from its three-year trading range, expressed as a percentage (0% = lowest in the range, 100% = highest in the range). “We use a three-year review period to achieve an effective balance. A three-year period is long enough to observe more than half of a typical business cycle (the US National Bureau of Economic Research estimates an average cycle of around 60 months), but short enough to maintain significant volatility and generate actionable signals,” stated Broker Elev8. - Over. The Malaysian Ringgit (MYR) leads. As of 20 March, MYR was trading at 94.09% of its three-year range, approaching its historical upper limit. - Lagging. The Indian Rupee (INR) remains an anomaly, falling to 5.05% of the range, indicating significant historical compression. Oil correlation: inflation proxy. Energy prices are a vital proxy for future Consumer Price Index (CPI) changes. These changes determine the hawkish or dovish tendencies of central banks, which in turn drive currency flows. This oil correlation study uses a 54-month rolling correlation to measure how closely each currency tracks oil price movements and to identify deviations from their historical relationships. - Overvalued. The Turkish Lira (TRY) appears stretched, showing a 31.52% overvaluation relative to its historical relationship with energy prices. - Undervalued. The Indian Rupee continues to show a ‘valuation gap’, trading 15.12% below the value implied by oil prices. Secular performance: the gold standard. Measuring one currency against another can be misleading. For example, a rise in GBPUSD may simply reflect US weakness rather than UK strength. To obtain a less biased view, this analysis compares each currency’s performance against gold, a neutral asset widely regarded as having intrinsic value. Unlike fiat ‘medium of exchange’, gold cannot be devalued by the printing press. Gold prices reflect physical supply and demand, allowing us to see the ‘real’ demand for currencies, free from central bank interference. We call this ‘secular performance.’ It reveals the true long-term demand or lack thereof for specific currencies. - Overvalued. The Nigerian Naira (NGN) is currently 42.66% overvalued compared to the gold benchmark. - Undervalued. The Swiss Franc (CHF) is clearly undervalued by 4.14%. Economic divergence: yield curve insights. Strong economic fundamentals ultimately must support currency movements, but isolating a single indicator usually does not provide a useful assessment, as each economy responds to different drivers. Although Gross Domestic Product (GDP) is the primary barometer of economic health, its quarterly release schedule makes it a ‘rear-view mirror’ indicator for active traders. Instead, Elev8 focuses on 10-year bond yields. Yields are a forward-looking benchmark for measuring investor appetite, and most importantly, they reflect market expectations for future monetary policy. The spread between two countries’ yields reveals divergence between expansionary and contractionary cycles. Typically, capital flows towards higher yields. - Overvalued. The Malaysian Ringgit is overvalued by 13.24% based on current bond spreads. - Undervalued. The Nigerian Naira is undervalued by 35.56%. Real Effective Exchange Rate (REER). The Bank for International Settlements (BIS) defines the effective exchange rate (EER) as a geometrically weighted average of bilateral exchange rates reflecting a country’s trade relationships with its partners. The BIS EER index is widely used as a measure of international price competitiveness and an indicator of external shocks. An increase in EER signals appreciation (decline in competitiveness), while a decrease indicates depreciation (increase in competitiveness). According to the latest BIS data, the Chinese Yuan (CNY) stands out as the most overvalued currency based on EER, while the Swiss Franc (CHF) appears the most undervalued. By combining overextension, oil correlation, secular performance against gold, economic divergence through bond yields, and effective exchange rate competitiveness, broker Elev8 produces a robust and multidimensional picture of the positions of the 20 most traded currencies in the world today. In this relative valuation framework, the US dollar (USD) is deliberately not analysed or ranked separately. As the primary benchmark and world’s reserve currency, the USD serves as the standard numeraire used to measure da