EUR Temporarily Rooted But Is Looking Left
IMF's Lagarde admitted last week that foreign exchange rates are not far from "fair value." Is this market trying to take her thoughts to task and trade them literally? Most of the recent market movements have been confined to relatively tight spaces. This is certainly not the ideal scenario when promoting the largest and deepest of asset classes. But, what does "fair" value mean?
To many non-major countries they have an issue. The current market perception is that many of the major's are at the moment mostly "undervalued." Prior to the credit crisis, a weaker major pairing like the EUR or JPY would have offset a stronger dollar. However, the current trade weighted index (TWI) has the majors undervalued by -8% when compared to the mean of the last three-decades. The minors or tier II reserves on the other hand are overvalued by +11% (AUD, CAD, SEK). Analysts note that the spread between the major and minor is the widest it has been for the same time period (19). So, relying...
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