Market News Bad for the euro! Nomura says euro is no longer cheap
Bad for the euro! Nomura says euro is no longer cheap
Nomura strategist Jordan Rochester said in a research briefing on Tuesday that the euro is cheap using CPI valuations, but expensive using PPI valuations. He added that monthly data from the Bank for International Settlements (BIS) from the 1960s showed that this was not the case. Even using the CPI as a deflator, the euro is not cheap either on a narrow or wide line.
2022-05-26
6469
The euro rose more than 1 percent against the U.S. dollar on Wednesday, according to research by Nomura Securities, but has been moving against a falling indicator of fair value that suggests the euro is no longer seen as cheap.
The euro briefly rose above 1.07 this week from below 1.05 at the open, but some fundamental value indicators suggest a move back to 1.05 is a more appropriate level, and the euro is still falling due to inflation.
" More and more models are suggesting that the euro is no longer cheap ," Nomura strategist Jordan Rochester wrote in a research briefing on Tuesday. "Next time you read an argument to the contrary, remember to check whether you are using CPI or PPI." ."
"The sharp rise in PPI inflation in the euro area has significantly lowered the euro's fair value valuation, and its CPI fair value estimate has not changed, as the euro area and U.S. CPI inflation measures remain relatively close to PPI inflation," he said.
There are many different types of financial models used by analysts to measure the appropriate value of a currency and define the level at which an exchange rate might be considered cheap or expensive.
But all of these are heavily influenced by inflation, and that's where the subtlety lies, as some models take their cues from the consumer price index, the CPI inflation rate, the central bank's target metric, while others are more affected by The impact of producer price index PPI inflation .
"Perhaps the output of the CPI model (which includes many services that cannot be traded overseas) is not what we should use to measure the value of things," he said on Tuesday. The only indicator."
He added: “The energy crisis is a bigger problem for the euro zone, which is more dependent on imported Russian gas than the US. It’s not just energy, it’s raw materials and food. That’s the euro zone PPI. The reason why inflation is much higher than in the U.S. ”
In recent years, it has often been said that the European single currency has been significantly undervalued relative to the dollar, an assessment supported by at least some of the more popular valuation models during this period.
But the pandemic and subsequent Russian invasion of Ukraine were game-changers, as they affected the prices of components and other inputs in manufacturing supply chains and led to higher prices for key fossil fuels such as oil and gas .
These factors have caused the euro zone's once-large merchandise trade surplus to turn into a deficit, which in turn has led to a decline in the once-large current account surplus, putting it at risk of turning into a deficit as well .
He said: “ As the trade balance in the euro area collapses, the other components of the current account cannot offset this. The combination of the current account deficit and the financial account components bodes well for the euro, but it still does not paint a good picture. screen ."
He said: “Even using trade-weighted measures to value the euro, combining the UK, the US, Japan, China and many others, we would come to a similar conclusion: the euro is cheap by CPI, but if you use PPI , the euro is very expensive .”
He added: “ Monthly data from the Bank for International Settlements (BIS) from the 1960s shows that this was not the case. Even using the CPI as a deflator, the euro is not cheap either on a narrow or broad line .”
EUR/USD daily chart
GMT+8 May 26 13:27 EUR/USD at 1.0679
The euro briefly rose above 1.07 this week from below 1.05 at the open, but some fundamental value indicators suggest a move back to 1.05 is a more appropriate level, and the euro is still falling due to inflation.
" More and more models are suggesting that the euro is no longer cheap ," Nomura strategist Jordan Rochester wrote in a research briefing on Tuesday. "Next time you read an argument to the contrary, remember to check whether you are using CPI or PPI." ."
"The sharp rise in PPI inflation in the euro area has significantly lowered the euro's fair value valuation, and its CPI fair value estimate has not changed, as the euro area and U.S. CPI inflation measures remain relatively close to PPI inflation," he said.
There are many different types of financial models used by analysts to measure the appropriate value of a currency and define the level at which an exchange rate might be considered cheap or expensive.
But all of these are heavily influenced by inflation, and that's where the subtlety lies, as some models take their cues from the consumer price index, the CPI inflation rate, the central bank's target metric, while others are more affected by The impact of producer price index PPI inflation .
"Perhaps the output of the CPI model (which includes many services that cannot be traded overseas) is not what we should use to measure the value of things," he said on Tuesday. The only indicator."
He added: “The energy crisis is a bigger problem for the euro zone, which is more dependent on imported Russian gas than the US. It’s not just energy, it’s raw materials and food. That’s the euro zone PPI. The reason why inflation is much higher than in the U.S. ”
In recent years, it has often been said that the European single currency has been significantly undervalued relative to the dollar, an assessment supported by at least some of the more popular valuation models during this period.
But the pandemic and subsequent Russian invasion of Ukraine were game-changers, as they affected the prices of components and other inputs in manufacturing supply chains and led to higher prices for key fossil fuels such as oil and gas .
These factors have caused the euro zone's once-large merchandise trade surplus to turn into a deficit, which in turn has led to a decline in the once-large current account surplus, putting it at risk of turning into a deficit as well .
He said: “ As the trade balance in the euro area collapses, the other components of the current account cannot offset this. The combination of the current account deficit and the financial account components bodes well for the euro, but it still does not paint a good picture. screen ."
He said: “Even using trade-weighted measures to value the euro, combining the UK, the US, Japan, China and many others, we would come to a similar conclusion: the euro is cheap by CPI, but if you use PPI , the euro is very expensive .”
He added: “ Monthly data from the Bank for International Settlements (BIS) from the 1960s shows that this was not the case. Even using the CPI as a deflator, the euro is not cheap either on a narrow or broad line .”
EUR/USD daily chart
GMT+8 May 26 13:27 EUR/USD at 1.0679
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