If you're a long-term currency trader, or looking to make an investment overseas and wondering if you should hedge your currency exposure, the chart below from ANZ Bank may be of some interest to you.
It ranks current currency valuations against the US dollar using an average score from behavioural equilibrium exchange rate (BEER) and purchasing power parity (PPP) models created by ANZ.
Using nominal interest rate and inflation differentials, along with relative terms of trade and investment-to-GDP ratios for individual currencies, something ANZ says are thought to affect the exchange rate movements in the medium-to-long term, the BEER model aims to assess how misaligned each is currently from fair value.
"We prefer the BEER model valuation framework for long-term forecasting… has two relevant advantages.It is simple and it does not rely on assumptions that are hard or impossible to observe in reality, such as measuring the level of output at full employment, and it allows us to include variables available at higher frequencies such as interest rates, so we can adjust forecast equilibrium values more often. "
"Across the G10 currencies, the largest deviation from fair value is in the Nordic currencies — SEK/USD and NOK/USD — and in USD/JPY, all of which are significantly undervalued."
"We suspect the dovish central banks in these countries are the reasons why the exchange rates have consistently undershot their fair value levels."
Cable, or GBP/USD, is also deemed to be undervalued, but ANZ warns that not too much weight should be placed on this assessment given uncertainty surrounding Brexit negotiations.
At the other end of the spectrum, the Swiss franc and Australian and New Zealand dollar's are deemed to be the most overvalued currencies right now. For the Euro and US dollar index, both are deemed to be around fair value at present, with the Canadian dollar also fast approaching the models perceived equilibrium level.
Source: Bloomberg Pro Terminal
Trader Bozhidar Arabadzhiev
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Derivatives and margin trading involve a high degree risk level. You should not trade Forex and CFD unless you fully understand how it functions, what your benefits can be, what your risk is, and what you may lose. Please, note that the losses can be practically unlimited and that the initial deposit will not permanently limit the risk. You have to fully realize your financial status and make sure that trading in derivatives hides the risk of losing the entire amount invested. Invest only the amounts that you are able to lose.