20180118-法国巴黎银行-BNP_Paribas_FEER_–_Long-term_valuation_24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 such as inflation, productivity, terms of trade, and net foreign assets (NFA). It aims to determine the exchange rate that aligns an economy with both internal and external balance.

Main Points

• FEER Definition: FEER is the exchange rate that corresponds with an economy operating at internal balance (potential output, inflation in line with central bank targets, and unemployment at NAIRU) and external balance (sustainable current account balance).
• Key Variables: The four main economic variables influencing FEER are inflation, productivity changes, terms of trade, and NFA.
• USD Valuation: The USD has narrowed its overvaluation to 13% on a trade-weighted basis. It is overvalued by 9% against EUR, 32% against JPY, and 14% against GBP.
• GBP Valuation: The GBP is undervalued by 14% against the USD and slightly cheap against the EUR. Overall, the GBP is trading 6% below its FEER.
• EUR Valuation: The EUR is undervalued by 9% against the USD, with the EURUSD FEER at 1.34. The eurozone current account surplus remains above its sustainable level.
• Commodity Currencies: The AUD and NZD are undervalued by 5% and 9% respectively against the USD, while the CAD is slightly overvalued. The SEK and NOK are undervalued against the EUR, but the CHF is overvalued.
• FEER Convergence: Over the years, long-term fair values in the eurozone have been converging. Germany's fair value has declined, while Greece and Italy remain at lower levels.
• Brexit Impact: A 'no deal' Brexit scenario could cause the GBP to be overvalued by 20% due to trade restrictions and reduced foreign demand for UK assets. The J-curve effect suggests the current account deficit may worsen before improving.
• NAFTA Impact: The renegotiation of NAFTA is unlikely to have a significant long-term impact on the CAD, though short-term uncertainty may affect exchange rates.
• Sustainable Current Account Balance: Determined by demographic factors and optimal savings behavior, it varies across countries. Japan, with an aging population, requires a surplus, while the US can sustain a deficit.
• FEER vs PPP: FEER accounts for more variables than PPP, such as terms of trade and NFA, making it a more comprehensive tool for long-term valuation.

Key Information

FEER Calculations

• FEERs are calculated using a multi-country model of current accounts to find exchange rates that would lead to sustainable current account balances.
• The process involves estimating the exchange rates that align with long-term macroeconomic fundamentals.

Currency Misalignments

• USD: Overvalued by 13% trade-weighted, 9% vs EUR, 32% vs JPY, and 14% vs GBP.
• GBP: Undervalued by 14% vs USD, slightly undervalued vs EUR (FEER of 0.85), and 6% below its trade-weighted FEER.
• JPY: Undervalued by 25% trade-weighted, with USDJPY FEER at 80.7. Japan's high savings rate and current account surplus contribute to its undervaluation.
• CAD: Slightly overvalued vs USD (FEER of 1.28), with limited long-term impact from NAFTA.
• AUD & NZD: Undervalued by 5% and 9% respectively vs USD.
• SEK & NOK: Undervalued vs EUR, but recent inflation and lower oil prices have caused their FEERs to rise.
• CHF: Overvalued vs EUR (FEER of 1.35) and USD (FEER of 1.01), despite low inflation and current account surplus.

Scenario Analysis

• Brexit Scenario 1: If the UK's current account deficit is not financed by long-term flows, the GBP may need a 10–15% depreciation to balance the current account.
• Brexit Scenario 2 (No Deal): A 'no deal' Brexit could cause the GBP to be overvalued by 20% due to trade restrictions and reduced foreign demand for UK assets.
• NAFTA Impact: A withdrawal from NAFTA would result in a small decline in CAD FEER (0.6%), while the USD FEER remains largely unchanged.

FEER vs PPP

• FEER is more comprehensive than PPP, as it includes terms of trade and NFA in addition to inflation.
• PPP is simpler but less accurate in capturing long-term valuation due to its reliance on relative inflation only.

Conclusion

BNP Paribas FEER provides a detailed framework for assessing long-term currency valuations based on economic fundamentals. It highlights the misalignments of major currencies such as the USD, GBP, JPY, and CAD, and evaluates the potential impact of macroeconomic and geopolitical factors like Brexit and NAFTA on exchange rates. The model suggests that while the USD is overvalued, the GBP is undervalued, and the JPY is significantly undervalued. FEER complements PPP by incorporating additional factors, offering a more nuanced view of currency valuation.