USD remains overvalued versus majors
MEVA now estimates EUR/USD at 1.27, USD/JPY at 101 and GBP/USD at 1.65. While we see near-term downside potential to EUR/USD in the midst of the risk of a Brexit as growth in the US strengthens relative to growth in euro area and as the market will start to factor in a higher probability of a US rate hike over the coming months, it is important to keep in mind that fundamental forces are still pulling EUR/USD higher. We further note that MEVA suggests that it is not only lack of additional easing from the Bank of Japan that has sent USD/JPY lower - fundamental forces are also in play. Finally, from a fundamental point of view it is worth noting that strong fundamentals limit the Brexit downside risk to GBP/USD.
Large correction potential for CHF and NZD
The Brexit risk has probably been a factor weighing on EUR/CHF recently - however, we note that fundamental forces are pushing the pair higher. MEVA indicates further correction potential of around 19% towards a level of 1.29. The MEVA estimate for NZD/USD has declined to 0.64, which suggests that the recent move higher is not justified by fundamentals. The same holds for AUD/USD, where the MEVA estimate now stands at 0.75. The MEVA estimate for EUR/SEK has increased to 9.22, which is close to the current level for EUR/SEK. It suggests that fundamental forces are weighing on EUR/SEK to a less extent than some observers think. The MEVA estimate for EUR/NOK has moved to 9.49 from 8.48, which means that EUR/NOK is currently trading close to a level that can be justified from a fundamental point of view. The large change in the MEVA estimate for EUR/NOK is mainly due to a large downward revision in the past six months' data for Norways terms of trade. The gradual recovery in oil prices has supported CAD over recent months and sent USD/CAD closer to the MEVA estimate of 1.22.
Note on data revisions
Since our previous update in February, revisions to input data on terms of trade have been made. There have been particularly large revisions to terms of trade data for Norway and Canada due to the high volatility in oil prices. Data revisions are inevitable in macroeconomic models. The revisions have had a significant impact on the MEVA estimates for EUR/NOK and USD/CAD.
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