UK POUND’S OVER VALUATION AT 19 MONTH HIGH
- Russian Rouble at parity with US Dollar.
- Brazilian Real stays strong ahead of the World Cup.
- Argentine Peso overvaluation reaches high of 25%.
The World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity, reflecting the real purchasing power of different nations, allowing for Rapid and accurate international price comparisons. Under/ Overvaluation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in Relation to the World Price Index calculated exchange rate.
The World Price Index Sterling PPP value for June is 0.73, compared to the market nominal exchange rate of 0.60. The overvaluation of the Pound against the US$ rose by 2.3% from May reflecting the continued real growth in the UK economy. The level of overvaluation has increased steadily for three successive months rising to a 19 month high. The nominal rate is unlikely to rise to correct this discrepancy between relative prices in the UK and the US until there are some clear signals that the Bank of England will raise interest rates pushing up the nominal market rate.
The Russian Rouble has risen by nearly 4% in purchasing power parity terms to reach parity with the US Dollar. The currency’s Relative under valuation has been falling for four successive months mainly due to short-term currency market influences.
The Rouble had been undervalued from February until May and for most of the second half of 2013.The combination of ambiguous moves by Putin to ease the crisis in the Ukraine, the potential of a long-term supply of energy to China and the in effectiveness of Western sanctions, has negated the negative currency market causes of the Rouble’s previous undervaluation.
The Brazilian Real’s overvaluation against the US dollar has risen By 1.85% in June continuing a four month trend as anticipation of the FIFA World Cup and its imminence has pushed up domestic prices, particularly for hotels, relative to the US. This short-term upward trend is contrary to the longer-term fall in the Real’s value relative to the dollar which persisted throughout 2013. This trend could resume after the short-term boost provided by the tournament to Brazilian GDP is over.
According to the WPI, Argentina’s peso should be at an exchange Rate of 10.09 to the US $. The official market rate is 8.10 suggesting an overvaluation of the market rate of 24.6% in June, up by 5.19% on the rate in May. The market rate was overvalued in Q4 2013 due to government interventions in the currency markets which reversed a devaluation of 20% in January which was found to be necessary to mitigate the impact on the country’s commodity exports. Unfortunately, the dual effect of continuing high inflation artificial restrictions on the supply of the currency and government support using official reserves, has meant that the Peso’s return to overvaluation has reduced the positive impact of the devaluation on competitiveness. The parallel, illegal or ‘blue’ exchange rate, stood at 11.55 pesos to the dollar on 5 June 2014, signaling a similar level of overvaluation to that suggested by the WPI data. The official rate does not look to be sustainable in the longer term.
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