If 1.15/1.25 is traditionally fair value for the euro…

Many a market practitioner views the area between 1.15 and 1.25 as a neutral area for EUR/USD; fair value, if you will. The euro was born within that range, its 200-month moving average comes in at 1.1878 (coincidentally or not, the low for this move) and neither side is particularly advantaged from an export perspective in that area.

In this environment, do the old perceptions still hold water? I’d argue that the massive expansion in both US monetary and fiscal activism in the wake of the global financial crisis moves the goalpost to some degree. Where should fair value be? (To be fair to the US, my assumption for the euro is that it has been dangerously flawed since inception given its lack of a cohesive economic government…)

1.20/1.30?

1.30/1.40?

Tough to put a precise range on it, but suffice it to say fair value is a bit firmer than the traditional 1.15/1.25 neighborhood I’d hazard a guess.

The one thing we know for sure about currencies is that when they are trending they tend to overshoot any esoteric measurement by miles.

If we concede that fair value is closer to 1.40, than perhaps we have already overshot to the downside in EUR/USD and we are presently undervalued.

This is purely food for thought, not a trading recommendation of any type. Markets often move well beyond levels seen as justifiable by the fundamentals and stay there for months, and at times for years…

45 Comments

  1. Wouldn’t the definition of fair value be in itself adjustable to the weighted fundamentals of each party? If so, we couldn’t possibly – presently – give fair value to EUR above parity :(

  2. Of course, fms…my assumption is that euro fundamentals have always been flawed from the outset…I’ll add that in…

  3. Some think tanks in germany calculates the purchasing power balance of a value of 1.12/15 acording to the data they use.

  4. Okay, so, Cameroon 82? ;)

  5. Not that it affects any actual trading decisions, but in the last 2 months I’ve moved my own fair value estimate from 1.14-1.22 to 1.21-1.29. Doesn’t mean I rule out a move to either 1.00 or 1.45 in the medium term though.

  6. Last time I read the Big Mac index I think Yhe Economist placed it at around 1.15. In any case, the fact that we are at a “fair” or neutral value now combined with the present circumstances for the EU and EZ make me favour the idea that there is still a substantial way down to go.

  7. I have not done one trade today…oh well. When in doubt do nothing. I have never seen a market go up with such lousy news like this. Very confusing

  8. I think the foundations of the old 1957 Treaty of Rome (Franco-German cooperation) will perish on the fallout of this crisis.
    Very long term (2020-2025) I see a possibility of Eurozone splitting into 2 different Euros East+West – Germany + countries happy to use German Fiscal policy and German Euro as their currency (Eastern Europe?) – a bit like the old DM, and France/Italy + everybody else.
    Very short term, Merkel stepping aside, German politics re-aligns.

  9. There’s some rather silly stuff going on over there right now, what with all the various shades of who’s trying to schmooze up to whom, all for the sake of snatching a bit of power and not for the good of Johann Public.

  10. More like a diagonal from Norway SEastwards, splitting both zones. Or protestants versus catholics, since the core differences between a culture of individual responsibility versus delegation in divine appraisal make for the same chasm as fiscal policy differences…

  11. Norway has oil and will always have it’s own currency. I can’t see the Dutch joining a German-run currency. Fun topic.

  12. Thank you guys for your comments but we already have AEP…Admit it the euro is a damn strong currency ! :)

  13. Yes, I’d like to extend this debate but for now I have to move my stakes in favor of North Korea vs Portugal… ;)

  14. have you bought gas in Europe Cheg?

  15. gas as gasolina ?

  16. humm, what’s ur point there ?

  17. Are u implying I am a molotov fan with my comments ? :)

  18. Cheg , The Dollar is a mighty currency even if it hurts my position(s). Gas is $3 a US gallon while in Europe is almost that per liter. You’re a professor so I’m sure you can calc the price.

  19. Jamie, “fair value” is an incredibly difficult concept and more so with Euroland given the lack of harmonisation of social policies. Westerners have struggled with the ability of the Euro trading bloc to unite due to the difficulties of language and culture.. and for this reason I suspect this is always going to be the headwind of any fair value. On the other hand, I suspect the markets resolve of the US trade deficit will be the main tailwind of Euro fair value, ..and so the battle lines are drawn. This is great stuff for us short term traders, but a real headache for central bankers. Your thoughts on AUD fair value ?

  20. 1€ ish is spain, 1,20 € ish in france, 1.20pound in the UK /L.
    3$ per gallon in the US, how much is it in Nigeria or Irak ?
    I must admit I don’t quite get ur point…sry

  21. Tony–Agreed, and it is a purely academic exercise…a fun little bar-room debating point. No one can prove you wrong!..

    I would put AUD in the 0.70/0.80 area regarding fair value….

  22. No Problem!

  23. Hey Annie, it’s a mad, mad world- the Fed, whom you can’t really fight, keeps money market rates so low that your average family has to speculate – and then when the employment and retail sales numbers are horrible, and the true dimension of the BP spill becomes known, and Spain debt issues rear their ugly cajas… boom! we break above the 1040-1108 range. But enjoy this calm before the storm- in a few months it is going to be election season, and half of the people in this country only trust deregulated big businesses and don’t trust any government agency who’s purpose isn’t to bomb and kill other people… It’s a mad, mad world, but it’s the only one we’ve got… :)

  24. Tony, WA should issue it’s own currency and let Sydney and Melbourne go. :P

  25. USD 4.75 per galon in Europe minimum. As far as Iraq buy the Dinar now!

  26. What about California issuing their own currency, FF? Or maybe uniting w/ WA/

  27. I think the point dcoios is making is that using oil as a reference the implied exchanged rate using the numbers he presents would be 1Eur = $0.55

    But if that’s the case, the comparison is not fair since most of the price you pay at the pump in Europe is pure tax (up to 80% of it)

  28. The taxes are making the difference and they’re be more on both sides of the pond

  29. why not use the price of water, electricity or even wine or how much it costs to get treated for cancer, or the amount of CO2 each country produces…pffff

  30. dcoios, Maybe Texas is a candidate. Cali has too many quakes.

  31. Thanks Jamie, and Canada ?

    Fluffy Fox, you can put QLD in the same box.

  32. Cali has really good building code.. Too good as far as I’ m concerned but TEXAS is A Fine Candidate

  33. Nothing moving in the FX I guess? Sean ! Where are you?

  34. Last point Emilio, as tony pointed out, fair prices/relative fair prices are almost impossible to determine, in constant move and subjective at the very least. For ex. he says that europe has a laguage and culture pbs. I m not sure there such a wide culture gap between a boston banker and a red neck vs a greek farmer and a london trader. Languages is an other issue, but all my children speak 4 languages and that s the same for my chidren’friends (I only speak 3). It will take time and many efforts, but hopefully we ll get there..Don’t kill the euro just yet… ;)

  35. That would be fertile ground to move on to a discussion over the Sapir-Whorf hypothesis, a thing I am also ver fond of given that in my family we are all prone to having a knack for languages – 7 for me, 5 for my wife, 3 for our eldest, and the confirmation, the youngest who can’t help himself with any other than pt…

  36. Gree Cheg and I think the Euro is here for ever. The cultural forces I refer to also include extreme political views and .. dare I bring it up .. religious fanatics.

    On another issue, I struggle with the CAD-AUD relationship. Sur ly they should be on par given so much similarities

  37. Hi Tony, The interest rate differential between Japan and Canada, and Japan and Australia may be the answer you are looking for. Australia has an artificially inflated currency because investors short JPY to long AUD. This makes the currency pair especially volatile. When the interest rate differential is deemed to be narrowing, this makes AUD fall. If there was ever a housing crash in Australia, the fall would be very severe.

  38. My EURUSD limit Buy @ 0.0001 expires tomorrow :O

  39. So does my AA membership ;)

  40. Well there will be plenty of opportunities to visit Alcoholics Anonymous in the future …

  41. I thought you said it was good for a month Blackie ;)

  42. Read the small print ;)

  43. Not killing it at all Cheg. Just think it is still way overvalued. Only God knows the real value of things. We can only approximate by price.

Top

© Copyright 2014 ForexLive™  |  Advertise With Us  |  Login To Comment  |  Sitemap

HIGH RISK WARNING: Foreign exchange trading carries a high level of risk that may not be suitable for all investors. Leverage creates additional risk and loss exposure. Before you decide to trade foreign exchange, carefully consider your investment objectives, experience level, and risk tolerance. You could lose some or all of your initial investment; do not invest money that you cannot afford to lose. Educate yourself on the risks associated with foreign exchange trading, and seek advice from an independent financial or tax advisor if you have any questions.

ADVISORY WARNING: FOREXLIVE™ provides references and links to selected blogs and other sources of economic and market information as an educational service to its clients and prospects and does not endorse the opinions or recommendations of the blogs or other sources of information. Clients and prospects are advised to carefully consider the opinions and analysis offered in the blogs or other information sources in the context of the client or prospect's individual analysis and decision making. None of the blogs or other sources of information is to be considered as constituting a track record. Past performance is no guarantee of future results and FOREXLIVE™ specifically advises clients and prospects to carefully review all claims and representations made by advisors, bloggers, money managers and system vendors before investing any funds or opening an account with any Forex dealer. Any news, opinions, research, data, or other information contained within this website is provided as general market commentary and does not constitute investment or trading advice. FOREXLIVE™ expressly disclaims any liability for any lost principal or profits without limitation which may arise directly or indirectly from the use of or reliance on such information. As with all such advisory services, past results are never a guarantee of future results.