What’s fair value for EUR/USD?

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Over the years, I’ve written pieces postulating that fair value (a truly nebulous term)  is probably somewhere in the 1.15/1.25 region. I base that on historical ranges, and quite frankly, on the seat of my pants. My definition of fair value is the level at which neither the US nor the euro zone has a particularly notable export advantage based sole on FX rates.

The advent of QE prompted me to revise up my fair valuation, using the sophisticated algorithm described above, to the 1.25/1.35 area.

Now that the ECB has taken the crown as the central bank with the largest balance sheet in the world, I guess we have to put fair value around 1.20/1.30.

How’s that for sophisticated econometrics?



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Jamie Coleman


  1. I agree. I spend about 5 months a year in Europe and the rest in the US and base my ‘method’ on a gut feeling of what about 100USD buys. When I start thinking ‘jeez, this costs a lot more than at the other place’, one or the other is overvalued. When I see prices (such as in 2008 when EUR/USD was 1.60) and think ‘This is stupidly insane’, then I might even think of exchanging and transferring some money. But, yeah 1.2 – 1.3 is about fair. I’m thinking of revising that lower to 1.15-1.20 though. This is based on the size of average pension payments vs. purchasing power of some of the..errrrrg….’less productive’ countries.

  2. what goods the U.S. exports to Europe?

  3. $267 bln worth of something last year

  4. Sounds like a guesstimate to me….and thats the talk around the water cooler but there are so many thing that we not pro’s like to call the X factor.

    The Euro would be $1.45 easy if they ousted Greece and a few other leaching countries. Germany and France with other could build a currency with real value but as long as you have someone picking your pocket because they are lazy then the Euro will struggle for years.

  5. J, this is both funny and true, very much true!! This is the your best remark of 2012 till now! By the way, I think Economist’s Big Mac index puts the value of euro in that range too!

  6. Jamie, shouldn’t that be $267 million, instead of billion?

  7. Hey Jamie,

    Thanks for trying to keep us awake! Here is my 2c…

    Markets generally punish the currency whenever its central bank eases; especially when the reason is to avoid a disaster, like LTRO 2.0.

    Moreover, when The Bernank avoided mentioning QE3, the USD climbed against the Euro. This can go on for a few percentage points.

    However, can we believe neither one will do more QE? No way, so they should still be in a tie (like two heavy-weight boxers hugging each other in the 15th round). The Euro actually has a minor advantage in short-term interest rate differential.

    Historically, interest rate differentials accounted for the majority of the moves (something like 80%) between the USD and the Deutsche Mark (and other majors as well).

    1.25 – 1.30 My guess.

  8. My fair value is 1.19 – that’s the value it closed at, on the first day it traded, Jan 5th, 1999.

  9. EURUSD might still have a bit of life left. If we close today at current level around 3195 or higher on fiber, it can go back up a bit. Consider a long position next week if it drops to 3125 or so (don’t get scared off). You should be decently rewarded for your courage. If we close below 3130 today by close, then we will see much more downside. Crazy forex logic!!

  10. no

  11. Truly advanced math…

  12. Hi Jamie .

    I agree with you but what do you think about oervalue Aud/usd ?What’s fair value for it ? thanks

  13. Hmm…..1 + i = (1+p) x E(1 + 3.14)…oh forget it. I’ll just go with the Big mac test.

  14. I agree with this but because of the inefficiencies of the markets, they have a tendancy to overshoot. I believe that eurusd will hit a couple hundred pips above parity late summer – fall and then rebound to repeat the cycle all over again. I am starting to build a long term short position as of now and will either exit when trend reverses or 1.0300.

  15. I’ve often wondered what these US exports are. In the UK, we don’t have many US products in the shops. Here, at my place, the US manufactured things that we have are French’s mustard, my Zippo, my GL420 and my wife’s Udderly Smooth udder (er, hand) cream!

  16. Jamie, what about the fair value of the euro versus the pound ?

  17. don’t worry guys/ fair value there where china will has decided

  18. My seat-of-the-pants model is not calibrated for EUR/GBP. I leave that to my friend in London…

  19. In the end, all that matters is market perception of future fair value. EUR benefits because they appear to be making an effort to deal with their mess. USD is held back by the perception that Washington only works on real problems every other year, and then only if it isn’t too politically inconvenient. You saw what Bernanke’s relatively benign comments did to price of gold earlier this week — down 100 in the span of six hours. Imagine what would happen if the market ever decides that US is getting serious about restoring fiscal balance. Now there’s a black swan worthy of note.

  20. I’d guess 90% of US exports to Europe are Apple products. What else could it be??


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