Is the AUD overvalued

Currencies. Is the CHF still overvalued?

Transcript

1 Currencies Is the CHF still overvalued? PK Assets AG Egglirain 22, Postfach 251, 8832 Wilen +41 (0)

2 Tactics in the foreign exchange markets: I II III IV Results of our currency models Results of our central bank models REER Conclusion 2

3 currencies AUD / USD AUD is no longer a high yielder, China as the sword of Damocles Building blocks Central banks: The key interest rate differential has been falling since 2011 and is now in the mid-range of history since the RBA is still in interest rate cut mode, the Fed is thinking about interest rates to increase further, although the market no longer believes in it. Real interest rate differentials: Almost complete convergence: The nominal interest rates have fallen significantly on both sides and the CPI is now almost identical, with which the real interest rates (10Y) have adjusted. Terms of Trade: The T.o.T. of the USA are on the rise after 4 years of sideways movement. The T.o.T. from Australia really crashed. The terms of trade have developed completely iametrically in favor of the USA. AUD / USD is highly correlated to these terms of trade. Purchasing Power Parity: Purchasing power parities and the exchange rate are not correlated in this case. In this case, the PPP is a clearly falling graph, which shows the wacgsebdeb inflation surplus of Australia compared to the USA and which has an ongoing moderating effect on the AUD. National debt: Much better in Australia. But the gap between Australia and the USA no longer increases when you compare the budget deficits. In recent years, the debt gap has capped Commodities: The various commodity sectors that we use have fallen significantly, but there is a clear reversal, especially in iron ore. China: Highly correlated with the AUD, especially exports and export prices to China. Should China devalue significantly, this should also become noticeable in the AUD / USD. Economic trends: The trend in the unemployment rate clearly speaks in favor of the USD. Likewise the course of our misery indices. Tech: Speaks clearly for the Aussie again! AUD: undervaluation against USD has decreased 3

4 currencies AUD / CHF Only the CHF is more expensive than the AUD Components Central banks: Two central banks in interest rate reduction mode. The key interest rate differential is close to the lower end of the history of the past 10 years. There is a clear correlation between the Reserve Bank of Australia and the currency pair, but since Lehman with massive leads and lags and outliers real interest rate differentials: nominal interest rates have fallen in parallel, inflation in CH has fallen even more sharply than in Australia. This means that the 10Y real interest rate difference is zero, rather low but not a record low. Terms of Trade: The T.o.T. from Australia really crashed. The T.o.T. increased significantly in Switzerland. The exchange rate reflects this divergence. Purchasing Power Parity: Purchasing power parities and the exchange rate are not correlated in this case. In this case, the PPP is a clearly falling graph that shows Australia's inflation surplus compared to the USA and has a steady, moderate effect on the AUD. National debt: This is not a major problem in either country and does not matter in the model. But: Australia is losing ground Commodities: The various commodity sectors that we refer to have fallen significantly, but a bottom could have formed China: Highly correlated with the exchange rate, but here the picture shows a higher exchange rate; This is due to the Chinese money supply, which has been greatly increased Risk appetite: continued high risk tolerance in the market, speaks slightly in favor of AUD. Economy USA: Doesn't help the Aussie at the moment Technology: Speaks clearly again for the Aussie AUD undervalued 4

5 Currencies: CAD / USD Real interest rates too low in Canada Central banks: Now identical, RBC recently responded to the bear market with interest rate cuts, the USA has seen its first rate hike. Real interest rate differentials: The nominal interest rates in Canada have fallen significantly below those in the USA, at the same time the CPI in Canada is slightly higher than in the USA, which means: Historically record high real interest rates in the USA Terms of Trade: The terms of trade have a mirror image in favor developed in the USA. CAD / USD is highly correlated to these Terms of Trade Purchasing Power Parity: Purchasing power parities and the exchange rate are well correlated in this case. Structurally, the PPP speaks in favor of CAD. National debt: This is not a big problem for Canada, but it is for the US. The differential has evolved in Canada's favor in recent years. Commodities: The various commodity sectors we use have fallen significantly. From this point of view, however, the currency pair China has: Highly correlated with the exchange rate, speaks more for a bottom in the exchange rate, above all because of the money supply and retail sales in China Risk appetite: The exchange rate is strongly correlated with the changes in the stock markets Economy Canada: Weak, pushes on the exchange rate labor market: Massive US outperformance. The unemployment rate in CAN is clearly increasing again Technology: Neutral LOONIE: undervalued but not extreme 5

6 currencies: CAD / CHF No interest rate advantage: neutral to CHF Components central banks: The key interest rate difference has been the average of the last 15 years, with both central banks tending to reduce rather than increase. The currency has historically correlated with the UK base rate, since Lehman there has been no correlation here. Real interest rate differentials: Parallel fall in nominal interest rates, most recently a clear opening of the inflation gap, with CH inflation clearly falling below that of Canada, thus: Extremely low real interest rate differentials, does not speak for the CAD. Terms of Trade: Canada's terms of trade have crashed downright, while those in Switzerland have risen significantly. However: The correlation is not significant Purchasing Power Parity: Purchasing power parity and exchange rate are not well correlated in this case. The PPP speaks structurally against the CAD. National debt: Canada's debt to the CH is very high, but has been stable in recent years (compared to GDP). Commodities: There are hardly any commodity prices that are well correlated with CAD / CHF, the few industrial metals speak for printing Technology: Trend points downwards, but technology is no longer negative for the currency pair CAN / CHF: Neutral 6

7 currencies: GBP / USD Brexit hits the pound Building blocks Central banks: Identical interest rate level, the BOE traditionally follows the Fed with a delay, but both are reluctant to normalize interest rates. They are currently speaking for the pound, but there is no correlation to the exchange rate. Terms of trade: Amazingly, both countries benefit from the commodity bear market via the terms of trade, since both import goods and export services. Purchasing power parity: Purchasing power parities and exchange rates are not correlated in this case. Structurally, the PPP speaks against the pound. National debt: The development has been going on since the financial crisis against the UK, as has the development in the current account. Recently, both factors have calmed down somewhat. Commodities: The various commodity sectors that we use speak in favor of lower exchange rates. China: The steady decline in economic dynamics has been putting pressure on the course for some time. With the increase in the money supply in China, the situation has eased a little risk appetite: falling and pushing the UK course. Economy: UK is running, puts upward pressure on the exchange rate

8 Currencies: GBP / CHF Brexit is pushing the course Components Central banks: The key interest rate differential has risen slightly again, but at 1.25 it is 2 percentage points away from the normality of the turn of the millennium. The currency pair follows and excludes the UK key interest rates with an impressive long-term correlation. Real interest rate differentials: Both nominal interest rates have fallen over the long term, and since 2011 the UK has lost a lot of its relatively higher inflation. In 2011, inflation in the UK was still higher than nominal interest! Thus: In terms of real interest rates, since 2011, since inflation in the UK has fallen more sharply, there has been an increase in relative real interest rates in favor of CH, since the UK real interest rates have been higher than those in CH for 2 years, albeit to a lesser extent. Terms of Trade: Both countries benefit from increased terms of trade. Purchasing Power Parity: Purchasing power parities and the exchange rate are not well correlated in this case. In this case, the PPP is a monotonously falling straight line that represents the UK's structural inflation surplus compared to CH and has a steady and moderate effect on the GBP. Public debt: the UK's Achilles heel, structurally depresses the exchange rate. Although the budget situation in the UK is improving somewhat, the structural increase in debt still weighs heavily on the UK economy exchange rate: Very strong, indicates a significantly higher exchange rate U.S. Economy: The labor market, consumption and the PPI play a major role here. Overall, much higher exchange rates are estimated. Technology: Still neutral, threatens to deteriorate significantly. Pound sterling: Significantly undervalued 8

9 Currencies: NOK / USD Norway suffers massively from the oil crash. Building blocks Central banks: The Norges Bank has always been around 2 years behind the Fed in the interest rate cycle. The key interest rate differential is close to zero, and therefore not low, but averaged over the last 15 years. On the basis of key interest rates, no correlation can be identified that is stable enough as a currency component. Real interest rate differentials: What happened? Norway's real interest rates have fallen below those of the US. However, inflation has persisted in Norway. As a result, real interest rates have fallen significantly in recent years to the detriment of Norway, not a good omen for the NOK Terms of Trade: mirror image of a massive movement in the opposite direction to the disadvantage of Norway. Purchasing Power Parity: Purchasing power parities and the exchange rate are well correlated in this case. The PPP has been running structurally against the NOK for a long time. National debt: Massive plus for the NOK, the difference in debt per GDP between the two countries is almost 80%! Commodities: The various commodity sectors that we use have fallen significantly, but all in all they indicate that the price has fallen below China: Highly correlated with the exchange rate, suggests a slight relaxation in risk appetite: the NOK oscillates with Chinese stocks as the best risk indicator for the foreign exchange rate technology: is now pointing upwards NOK / USD: well undercut, but trend not yet reversed 9

10 currencies: NOK / CHF slaughtered building blocks Central banks: Both countries are in the interest rate cut mode, the interest rate difference of 1.5% is well in the middle of the range of the last 10 years. The currency pair discounted the key interest rate differentials with a lead of about one year. Real interest rate differentials: Real interest rates in Switzerland are significantly higher than in Norway! This is mainly due to the stubborn inflation in Norway and deflation in Switzerland. Terms of Trade: Mirror-image massive movement in the opposite direction to the disadvantage of Norway. Purchasing Power Parity: Purchasing power parities and the exchange rate are not well correlated in this case. In this case, the PPP is a monotonically falling straight line that represents Norway's inflation surplus compared to Switzerland and which has a steady, moderating effect on the NOK. National debt: No problem in both countries, nor is the current account commodities: We are only looking at oil, namely at the annual change, which recently speaks again for the NOK China at this level: The steady decline in economic dynamics calls for a low exchange rate, But from this point of view, the exchange rate seems to have fallen below, or there are signs of a calming down in the labor market: Norway is losing ground as the low oil price affects the domestic economy Technology: Is no longer negative for the NOK NOK / CHF: Undershot, but trend not yet reversed 10

11 Currencies: SEK / USD Hidden value in SEK SEK / USD: Slightly undervalued, but trend not yet reversed. Building blocks Central banks: Sweden has set interest rates to negative as part of the currency war. This means that the interest rate difference compared to the USA is not particularly low, but has been real interest rate differentials averaged over the last 15 years: Swedish interest rates have fallen well below American rates. At the same time, the inflation differential has remained small. This means that the real interest rate differential is small, even negative. Terms of Trade: Both countries benefit synchronously from improved terms of trade. Purchasing Power Parity: Purchasing power parities and the exchange rate are not well correlated in this case. In this case, the PPP is a rising graph that shows the US inflation surplus compared to Sweden and continuously boosts the exchange rate. Public debt: clear plus for the SEK, although the relative budget dynamics have subsided. The massive difference in debt to GDP of 60% between the two countries is stable. Commodities: Commodities are positively correlated to the exchange rate, no wonder the pressure from this direction on SEK China: The steady decline in economic dynamics calls for a low exchange rate, but from today's perspective the exchange rate seems adequate Economy Sweden: Much stronger than the exchange rate implies Technology: No longer negative for the SEK 11

12 Currencies: SEK / CHF How much longer will Sweden continue to manipulate the market? Good value SEK / CHF: Still attractive Building blocks Central banks: Both central banks in interest rate cut mode, and both at negative interest rate Real interest rate differentials: Real interest rates in Switzerland are higher than in Sweden. While interest rates have imploded completely in both countries, inflation in Switzerland has continued to fall negatively, while in Sweden positive values ​​have recently returned. On balance, the real interest rate differential is therefore unusually negative. Terms of Trade: Both countries benefit synchronously from improved terms of trade. Purchasing Power Parity: Purchasing power parities and the exchange rate are not well correlated in this case. In this case, the PPP is a straight line that falls with pauses, which represents Sweden's inflation surplus compared to CH and has an ongoing moderate effect on the SEK.National debt: Neither a problem in CH nor in Sweden, so neutral, even if the gap opens up in favor of Switzerland Commodities: Here the industrial metals are decisive. Their correction or bear market is like lead on the China foreign exchange rate: The steady decline in economic dynamics has long called for a lower exchange rate, but from this point of view the exchange rate seems to have fallen below, and a recovery is underway Labor market: Sweden's labor market is slowly recovering, CH- Unemployment rate fluctuates. Good correlation, high weighting in the model, implies a significantly higher exchange rate. Risk appetite: does not play a major role in the model, but is definitely correlated, suggests a significantly lower exchange rate Technology: positive for SEK / CHF 12

13 Currencies: USD / CHF USD still slightly undervalued Components of central banks: The key interest rate differential is rising again and is currently at the level of 2001, i.e. neither extremely low nor particularly high. Real interest rate differentials: Real interest rates 10 years higher in Switzerland! While interest rates have fallen in parallel, inflation rates have recently diverged, the American rates have risen slightly again, the Swiss have continued to fall, so that the real interest rate differential has become negative again. Terms of Trade: Both countries benefit synchronously from improved terms of trade. Purchasing Power Parity: Purchasing power parities and exchange rates are well correlated in this case. In this case, the PPP is a monotonously falling straight line that shows the US inflation surplus compared to CH and continuously drives up the CHF National debt: A clear plus for CH: While the budget deficit in the US has improved, albeit from a very poor level, it is increasing Difference in debt per GDP continues to decline, soon to be 80% Technology: Still positive dollar remains slightly undervalued 13

14 Currencies: EUR / CHF Massive undervaluation Building blocks of central banks: Both central banks in the currency war, CH operates with negative interest rates, EMU with quantitative easing. Correlations to the key interest rate differential are not found, however, real interest rate differentials: Real interest rates 10 years higher in Switzerland! While interest rates have fallen in parallel in Europe even more markedly than in Switzerland, the inflation rates have recently diverged, the European rates have remained at zero, the Swiss have continued to fall, so that the real interest rate differential has become negative again. Terms of Both countries benefit synchronously from improved terms of trade. Purchasing Power Parity: Purchasing power parities and the exchange rate are not well correlated in this case. The PPP has a clear downward trend, which represents the inflation surplus of the EMU compared to CH and is constantly putting pressure on the EUR. National debt: Clear plus for CH: While the budget deficit in the euro zone has improved, albeit from a very poor level, the difference in debt per GDP continues to rise to 60% Technology: is now strongly positive for the EUR Euro: Significantly undervalued 14

15 Currencies: EUR / USD We still have to earn a lot of advance laurels for the dollar. Building blocks of central banks: The ECB has been fighting for a lower EUR / USD exchange rate since 2012, the key interest rates are now below those of the UA.Since the two regions are out of phase, the key interest rate differential fluctuates from 3 to -3, which is currently the average of the last 16 years. Real interest rate differentials: The real interest rate difference is now exactly zero! While interest rates in Europe have fallen more markedly than in the USA, inflation in the USA has recently been higher, so that the real interest rates are identical for the 10-year range. Terms of Trade: Both countries benefit synchronously from improved terms of trade. Purchasing Power Parity: Purchasing power parities and exchange rates are well correlated in this case. The PPP has a clear upward trend, which represents the US inflation surplus against the EUR and is constantly exerting upward pressure on the exchange rate. National debt: trend has turned in favor of the EUR, but hardly correlates with the exchange rate Technology: positive for the EUR EUR / USD: the euro is undervalued 15

16 Currency Analysis The Model Results UNDERVALUED OVERVALUED 16

17 Tactics in the currency markets: I II III IV Results of our currency models Results of our central bank models REER Conclusion 17

18 Central banks: Fundamentally justified key interest rates Our central bank models: These are intended to describe the fundamentally justified central bank interest rates, not the effective ones, especially since the central banks are in a currency war. They convey a picture of the true strength of the country's economy and the need to raise or lower key interest rates in the medium term. USA Inflation and deleverage are like lead on key interest rates, all of our other indicators, like the model, speak for higher key interest rates as a whole. Current: Trend: Accomodative Fed is considering whether interest rates should actually be increased further. Interest rate fantasy intact but limited EMU The euro zone is moving away from the crisis levels! Consumption, trust, construction, money supply, capacity utilization, everything is rising, only prices are rising, price expectations and price sentiment are (still) at a low level Current: Trend: Accomodative deepening QE Leaving crisis level, but ECB wants a weaker EUR 18

19 Central banks: Fundamentally justified key interest rates CH The impact of the appreciation continues to have an impact on many channels, so that the negative interest rates are currently justified mainly because of the downward inflationary pressure. Current: Trend: Adequate What is the Eurozone doing? Deflation supports negative interest rates and provides relief for the UK franc. All parameters are based on higher key interest rates, with the exception of the CPI, which is itself a subsequent factor. The justified key interest rates are significantly higher Current: Trend: Accomodative Accomodative Only Brexit speaks for a weak pound 19

20 Central banks: Fundamentally justified key interest rates CAN The country was hit by the commodity slump and offers a mixed picture: While growth is congruent with the key interest rate, the CPI, capacity utilization and employment (still?) Speak for a higher level, oil prices, wages and Retail sales already for lower levels Current: Trend: Adequate Further easing possible, but CPI rises again Without commodity rebound little imagination in CAD AUD CPI, labor costs and China are depressing, but unemployment, capacity utilization and consumption like sentiment, i.e. the economy ex commodities, speak for higher key interest rates. Current: Trend: Accomodative Accomodative China is depressing the central bank and the AUD. Correlated to Renminbi, high potential for devaluation if China devalues ​​drastically 20

21 Central banks: Fundamentally justified key rates SEK Neither consumption, capacity utilization nor unemployment speak in favor of negative key rates, not even the CPI, which is at zero, but only the primacy of the currency war, the prevention of an appreciation against the euro. The justified key interest rate is clearly in positive territory. Current: Trend: Accomodative Accomodative Sweden is in a currency war. How long will the Riksbank hold out? High appreciation potential NOK If you combine growth, unemployment and capacity utilization into a single index, you can see that Norway is suffering, that the economy is moving at the level of the crisis as a result of the oil price crash. The terms of trade in particular drag the model down to a low key interest rate. Current: Trend: Adequate Even lower oil: Recovery would help NOK massively 21

22 Tactics in the foreign exchange markets: I II III IV Results of our currency models Results of our central bank models REER Conclusion 22

23 REER: "REER": Real Effective Exchange Rate This means the trade-weighted real external value of the currency, i.e. the normal exchange rate after adjusting for the inflation differential with other countries. The country with the higher price level can shop more abroad than at home. In real terms, this exchange rate is higher as nominal A high REER indicates an overvaluation according to this theory. According to this theory, the following currencies are trade-weighted overvalued: GBP, CHF And the following currencies are undervalued: NOK, EUR, SEK, CAD, USD are more neutral: AUD, 23

24 Tactics in the currency markets: I II III IV Results of our currency models Results of our central bank models REER Conclusion 24

25 Conclusion Currency pair Undervaluation in% In STA * REER ** Technology *** EUR / CHF 14% 2.2 OK OK GBP / CHF 13% 3.0 OK - EUR / AUD 13% 2.0 OK - GBP / AUD 12% SEK / CHF 10% 1.9 OK OK NOK / CHF 9% 2.1 OK - NOK / USD 7% 1.6 OK - USD / AUD 7% 1.1 OK - EUR / USD 7% 1.1 OK - GBP / USD 6% USD / CHF 6% 1.1 OK OK * STA = Standard deviation of the difference (actual model) ** Does the REER stand in the way of the currency pair? E.g. is the undervalued currency according to the model overvalued according to REER? *** Has the course changed in the desired direction? 25th

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