USD and Purchasing Power ParityMarch 06, 2015
We mentioned yesterday that the US dollar is again breaking out and that tends to be negative for most stocks around the world. Today, we thought we would continue to look at US dollar strength.
The nominal trade-weighted dollar index by major currencies is again very close to breaking out to 11+ year highs.
The real trade-weighted dollar index by major currencies had its 7th consecutive monthly rise in February. It just reached its highest level since March 2003.
Our Purchasing Power Parity diffusion index has fallen to +2. This means that out of the 18 currencies that we track, 10 are overvalued on a PPP basis and 8 are undervalued on a PPP basis. Compare this to June 2014, when our diffusion index was at +12. At that time, 15 currencies were overvalued on a PPP basis and only 3 were undervalued.
The Canadian dollars is a notable currencies that has very recently flipped from being overvalued to undervalued on a PPP basis. The CAD was 27% overvalued in the middle of 2011. It has been on a steady decline since and is now 4.5% undervalued.
The Australian dollar is still overvalued on a PPP basis. However, the extent of how much it is overvalued has fallen from 46% in 2011 to 6% overvalued now.
Lastly, the Euro is now undervalued by almost 13%. This is the most undervalued it has been relative to the USD since 2003.