Currencies. Valuation

Twice a year, we try to calculate the "fair value" of the main currencies, just to get the flavor of what's going on. Our model takes different data into account: PPP, expected inflation, expected interest rates, etc. However, we are not considering monetary policies. We hope we will value their effects instead.

We have just finished this year's first valuation and the results are understandable, but in certain cases surprising.

Let's start with the Swiss franc and Norwegian krone. Both currencies are used as safe havens, therefore we have to pay a premium to own them. For the first one, the premium is around 20%, and for the NOK, close to 13%. This is the reason we prefer to hold NOKs instead of CHFs. Due to the enormous money printing Switzerland is doing, what last year was a fair cross, now it seems overvalued.

For the rest, in general, the euro appears expensive: with the British pound around 19%, with the Canadian dollar 11%, with the Aussie 7%, and with the USD 6%. So, good options to keep our foreign cash could be CAD and AUD.

We are not so worried about the EURUSD cross, because it somehow seems controlled within a range. When everyone was saying that Europe was going to disappear and the EURUSD was going to reach the parity, we advised to wait. Now, the opposite could be happening.

Last, the yen. According to our model, EURJPY should trade close to 95. Instead, it's playing around 125. It's a big difference and bad news for loan owners in yens. However, this is a statistical model. If for whatever reason Japan is unable to maintain its present situation with all the manipulation (a bet that many are taking into serious consideration), the model will not be useful and the EURJPY will tend to go much higher.