Our approach to currency valuation

This Focus provides an overview of the concepts and models underpinning our new FX Markets Valuations Monitor. It is split into three sections. The first explains our framework for thinking about currency valuations. The second provides details on the key concepts and models we use to estimate “equilibrium” exchange rates. The third describes how we apply these tools in our analysis of currencies, and how best to interpret the outputs from our suite of models.
Jonathan Petersen Markets Economist
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More from FX Markets

FX Markets Weekly Wrap

FX markets likely to remain volatile into year-end

After rallying to its highest level of the year last week, the US dollar seems set to end this week broadly unchanged. In our view, this reflects the offsetting effects of rising short-term yields in the US (particularly after Chair Powell’s comments to Congress on Wednesday) and falling long-term yields amid growing concerns about the Omicron variant. Despite today’s mixed payrolls report, we think the bigger picture remains that sustained inflationary pressures in the US are likely to support faster policy normalisation by the Fed and keep the dollar strong. In addition to uncertainty about the Omicron variant, we expect next week’s CPI data from the US and the wide range of central bank meetings to keep volatility in FX markets elevated throughout December.

3 December 2021

FX Markets Update

We anticipate that the rand will remain weak

The South African rand has rallied over the past few days after reaching its lowest level against the US dollar in more than a year following last week’s news about the Omicron variant. Even if the new variant doesn’t lead to a major round of renewed virus containment measures, we think that the currency will remain under pressure from both domestic and external headwinds for much of 2022. In view of the wider interest, we are also sending this FX Markets Update to clients of our Africa Economics Service

1 December 2021

FX Markets Weekly Wrap

COVID throws another curveball

News late yesterday of a new and potentially more dangerous variant of COVID-19 emerging in South Africa has made a dramatic impact on financial markets today. In general, market shifts have been similar to those in previous periods of renewed uncertainty around the path of the pandemic. Risky assets and currencies have fallen across the board today, while bond yields have dropped sharply and safe havens – notably the yen – have rallied. Short-term rate expectations, which had risen significantly in the US and other DMs over recent months, have been pared back rapidly.

26 November 2021

More from Jonathan Petersen

FX Markets Weekly Wrap

Dollar rally takes a breather as US Treasury yields stall

The US dollar looks set to end the week little changed against most currencies, as US inflation data – this week’s main data release – failed to push up the currency further. Next week, the minutes of the Fed’s July meeting may shed more light on policymakers’ latest thinking, and we expect the RBNZ will be the first among developed market central banks to raise rates with a 50bp hike, more than the 25bp hike that is widely anticipated.

13 August 2021

FX Markets Update

We expect rising UST yields to extend the dollar’s rally

We expect further rises in US Treasury yields to support continued gains in the US dollar against most other developed market (DM) currencies, especially the yen and the Swiss franc.

13 August 2021

FX Markets Update

We expect commodity currencies to remain under pressure

Although the currencies of most commodity exporters appear undervalued in the context of high commodity prices, we still think most commodity currencies will depreciate further against the US dollar.

11 August 2021
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