BCA Research: Euro undervalued

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BCA Research: Euro undervalued

BCA Research, one of the world’s leading independent providers of global investment research, favours a pro-cyclical currency stance despite the recent sell-off in currencies such as the EUR and the AUD.

BCA says following a steady advance since the start of the year, risky assets were due for some sort of pullback. “The outcome of the Greek debt swap was one of many reasons cited for the sell-off in risk assets and pro-cyclical currencies,” says Harvinder Kalirai, chief strategist at BCA.

“But these assets and currencies were overbought and due for correction anyway.”

BCA believes that pro-cyclical currencies will be less affected by the sovereign debt crisis in the future.

Sovereign debt crisis has caused EURUSD to trade
at substantial discount
 

It has modelled EURUSD against the behaviour of the other G10 currencies from 1999 to 2009 – prior to the eurozone debt crisis. Using the model, BCA then ran an out-of-sample estimation from 2010 for EURUSD. Kalirai says deviation from the model can be considered a proxy for the effect of the debt crisis.

The exercise showed that the EURUSD stands more than 20%, or three standard deviations, below the model’s estimated value.

“While this is above the lows of mid-2011, there is still a substantial discount imbedded in EURUSD,” says Kalirai. “In other words, the market has priced in a lot of bad news.”

He believes Europe’s debt crisis has been fully discounted and that the pullback in cyclical currencies should be viewed as a healthy technical correction.

“Maintain a pro-cyclical currency strategy, including the commodity currencies,” he says.

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