British Pound Starts 2017 Significantly Undervalued According to Deutsche Bank
Research from Deutsche Bank places Pound Sterling as one of the world’s most undervalued currencies as we head into 2017.
Of 31 currencies analysed, Sterling is third cheapest on a DBeer valuation.
The DBeer model is Deutsche Bank’s own version of the BEER model (Behavioural Equilibrium Exchange Rate) which is a well-used method of calculating valuations amongst economists. The model essentially attempts to gauge whether a currency is over- or under-valued in relation to its economy.
An undervaluation on this count would fit with the observation that Sterling fell ~15% in 2016 despite the UK economy being the fastest growing G10 nation for the year.
Overall, when other forms of measurements are included, the currency is the 12th most undervalued:
For those with a long-term view to the currency suggestions that it is undervalued could imply the need for a sustained recovery over coming months.
The problem however is that noting a currency is out of whack with fundamentals has very little forecasting powers. The currency may stay undervalued for years.
Commenting on the finding is Deutsche Bank’s Gautam Kalani based in London:
“Our preferred Behavioral Equilibrium Exchange Rate model (DBeer) suggests that the December exchange rate is significantly overvalued (in TWI terms) for CNY and BRL in EM. On the other hand, many EM currencies have undershot their DBeer equilibrium values, with MYR, TWD, PLN, TRY, HUF, ZAR, CLP, PEN, COP and MXN all significantly undervalued.
“In G10, CHF and USD are overvalued while GBP, JPY, CAD, EUR and SEK are undervalued.”
Source: PoundSterling – British Pound Starts 2017 Significantly Undervalued According to Deutsche Bank
