Great Graphic: Euro and Value

This Great Graphic is a monthly chart of the euro from Bloomberg, with a 120- month (ten-year) moving average.  It comes in now just below $1.32. 

In their pure form currencies do not have an income stream, making valuation more elusive.  Economists have derived many equilibrium models around which currencies ought to gravitate around in the long-run.  

Currencies also gravitate around a long-term moving average by definition.  The OECD calculates purchasing power parity for the euro at $1.24.  Since  the second half of 2002, the euro has traded below the OECD estimate of PPP on two separate occasions, in Q2 10 as the Greek crisis unfolded and again in H1 2012 as pressure built on Spain and Italy. 

The euro is now just shy of 7% above the OECD PPP and less than 1% from its 10-year moving average.  In the era of floating exchange rates these are minor deviations.   In fact, by the OECD's measures, the euro is the least over-valued of the G10 currencies. 

Many are seeing Juncker's recent comments at yet another shot in the currency wars.  His appears to be a fairly isolated voice in Europe.  Recently, Martin Feldstein, no strong advocate of the EMU experiment, was quoted at the start of the year suggesting European policy makers should consider a coordinated approach to weakening the euro.  Juncker's comments are not that.  German (Economics Minister) and an ECB official (from Austria) contradicted Juncker. 

The trend line that we continue to monitor, drawn off the late July 2012 low near $1.2040 and mid-Nov lows near $1.2660, comes in now just above $1.30.  The euro rallied a bit more than 3.5 cents off the Jan 10 low near $1.3040 to $1.3400.  It barely retraced 38.2% of the move at $1.3265 (today's low is ~$1.3256).  Near-term offers may cap bounces toward $1.3320.