FX misalignments: An official starting point – Deutsche Bank

Alan Ruskin, Macro strategist at Deutsche Bank, suggests that in a world of harsh rhetoric on free trade and fair currency practices, the IMF external sector report is likely to gain traction as a framework for officials to discuss hot button issues.

Key Quotes

“The latest IMF individual economy assessments completed at the end of H1, and published late last week, show staff estimates of expensive REERs include: the USD, GBP, BRL, CHF, TRY, MYR and AUD. The USD is up near the very top of overvalued currencies. This might be used within some official circles to argue against further USD gains. DB’s own valuation metrics point to a more modest USD overvaluation that should be less of a constraint to the USD’s upside.

On the side of ‘cheap currencies’ are: the SGD, JPY, KRW, and SEK. Among the policy implications are affirmation that valuation considerations work against both BOJ FX intervention, and the current highly accommodative Riksbank rates (and implied FX) policy.

The EUR is less exciting in aggregate (about 5% undervalued) but for Germany the EUR is assessed to be 15% cheap, while for France and Spain the EUR is assessed to be 6% and 7.5% too expensive respectively. This will add pressure for a German fiscal stimulus to realign savings relative to investment.

Among the widest estimates of fair-value are those for the CHF and CNY. On the CNY, the level of uncertainty is such that the currency could be 10% undervalued or 10% overvalued, in contrast to DB’s estimates that the Rmb is still expensive.”