USD still looks overvalued
Since we published FX Strategy: G10 MEVA signals update on 13 October 2016, there have been only small changes in most USD MEVA estimates. MEVA estimates EUR/USD at 1.27, still suggesting that USD is overvalued against the EUR and signalling that, despite optimism regarding some of Donald Trump's policy suggestions, fundamental factors will support EUR/USD.
MEVA still estimates GBP/USD at 1.65, suggesting that the GBP is the most undervalued currency according to the MEVA model. Since October, we have seen a few UK data releases, which have generally surprised on the upside. However, with continued high uncertainty and the Brexit negotiations still to come, we advise not putting too much emphasis on this particular signal until we have seen more concrete evidence regarding the effects of Brexit.
Along with EUR/CHF, cf. below, MEVA estimates the largest correction potential for EUR/USD and GBP/USD. For the former two, the correction potential is around 20%, while for the latter it is 37%.
USD also looks overvalued vis-à-vis the JPY. According to MEVA estimates, the move higher in USD/JPY since October is not in line with the development in fundamental factors. USD/JPY now seems overvalued according to MEVA, which estimates USD/JPY at 100.
EUR/NOK estimate higher again, EUR/SEK almost unchanged
The MEVA estimate for EUR/NOK has seen another move higher to 10.34, with the Norwegian terms of trade still weighed down by a low oil price. With EUR/NOK trading around the 9.05 level, the MEVA model suggests the NOK is substantially overvalued. Note that EUR/NOK is the only pair where there is significant divergence between Danske's PPP estimate and the estimate from the MEVA model. Hence, we advise clients to interpret the results from the MEVA model with caution.
Since our last MEVA update (13 October 2016), EUR/SEK has moved lower, closing some of the gap between the spot and MEVA estimate but, with an almost unchanged MEVA estimate of 9.38, there is still slight potential for a correction lower for EUR/SEK.
Large correction potential in CHF
EUR/CHF remains one of the FX pairs with most correction potential. The MEVA estimate has moved higher to 1.30. In our view, the current upward pressure on CHF on the back of, for example political uncertainty, cannot be justified from a fundamental point of view.
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