20170112-法国巴黎银行-BNP_PARIBAS_FEER_Fundamental_Equilibrium_Exchange_Rates_Long-term_currency_valuation_23页_1mb

BNP Paribas FEER Summary

Core Content

BNP Paribas FEER (Fundamental Equilibrium Exchange Rate) is a long-term currency valuation model based on economic fundamentals. It aims to determine the exchange rate that aligns with both internal and external economic balances. The internal balance refers to an economy operating at potential output, with inflation and unemployment rates in line with their targets, while the external balance implies a sustainable current account balance.

Key Factors Affecting FEER

• Inflation
• Productivity changes
• Terms of trade (mainly influenced by commodity prices)
• Net foreign assets (NFA)

Currency Valuations

Main Points

• The USD is overvalued by 26% on a trade-weighted basis, and rich by 25% against the EUR, 38% against the JPY, and 26% against the GBP.
• The GBP is undervalued by 25% against the USD but is fairly valued against the EUR. Overall, the GBP is 6% below its FEER on a trade-weighted basis.
• The EUR is undervalued and has seen its FEER increase due to a rise in the eurozone's net foreign assets and low inflation.
• The JPY is undervalued by 37% against the USD and 14% against the EUR. Japan's loose monetary policy contributes to this undervaluation, but capacity constraints limit the benefits of a weak currency.
• Commodity currencies like the AUD and NZD are also undervalued. The AUD is at 0.86, and the NZD is at 0.77.
• The CHF appears overvalued against both the EUR and USD, but its overvaluation has not led to a decline in Switzerland's current account surplus, suggesting it could persist.
• The SEK and NOK are undervalued, with the SEK at 7.62 and the NOK at 7.84. Norway's current account surplus is considered too large based on optimal savings rate analysis.

Brexit Scenario Analysis

Scenario 1: Foreigners lose appetite for UK assets

• The UK's current account deficit was 7% in the four quarters up to Q3 2016, supported by foreign investment.
• If foreign demand for UK assets were to cease, the GBP would need to depreciate by 15% to balance the current account.
• Since the Brexit referendum, the GBP has depreciated by 13%, but the J-curve effect implies the current account deficit may worsen before it improves.

Scenario 2: Trade barriers with the EU

• 50% of UK exports go to the EU. If trade barriers significantly reduce these exports, the GBP would need to depreciate by 30% to offset the impact.
• In a softer scenario, a 13% depreciation would be sufficient if exports to the EU decline by a third, which aligns with the depreciation since the referendum.

FEER vs PPP

• PPP (Purchasing Power Parity) uses relative inflation as a valuation metric and is simpler, but it does not account for terms of trade and net foreign asset positions.
• Over the past 15 years, FEER has diverged from PPP due to the increasing importance of terms of trade and NFA.

FEER Calculation Methodology

• FEER is calculated based on long-term economic fundamentals and aims to find the exchange rate that results in a sustainable current account balance.
• The sustainable current account balance is derived from demographic factors and the life-cycle consumption-smoothing hypothesis.
• The CLEER™ model provides short-term fair value estimates based on current macroeconomic fundamentals, complementing the long-term FEER approach.

Legal and Ethical Disclaimer

• This document is non-independent research and constitutes marketing communication.
• It is not investment research and does not meet the legal requirements for independent investment research.
• BNP Paribas may have conflicts of interest and may engage in transactions inconsistent with the views expressed in the document.
• The indicative prices and forecasts are based on internal models and may vary significantly from other sources.
• No guarantees are made regarding the accuracy or completeness of the information, and no liability is accepted for any losses resulting from reliance on the document.

Conclusion

BNP Paribas FEER is a comprehensive tool for assessing long-term currency valuations. It highlights the overvaluation of the USD, the undervaluation of the EUR, JPY, AUD, and NZD, and the overvaluation of the CHF. The model also provides insights into how Brexit scenarios could impact the GBP and the importance of demographics in determining sustainable current account balances.