We introduce the Danske G10 Medium-Term Valuation (MEVA) model which is a quantitative framework for bridging the short- and the long-term of FX economics by providing 'valuation anchors' for major currency pairs.
MEVA models real bilateral exchange rates based on a selected set of macroeconomic factors but results are converted to nominal 'fundamental' values for relevant currency pairs at a given point in time. We argue that these are relevant as directional indicators on a 12-36M horizon.
The G10 MEVA currently points to EUR/USD being undervalued with a model estimate of around 1.28, hinting that a correction higher in the cross is looming. In contrast, the moves higher in EUR/SEK and EUR/NOK alike in recent years are largely warranted by model fundamentals, suggesting that no large corrections are due.
Given that the MEVA has a half life of around two years, we suggest using the model signals as a key input for 1-3Y forecasts and associated hedging recommendations. Specifically, on the basis of, among other things, current MEVA signals, we recommend EUR-based clients to lock in USD income/assets beyond the 6M horizon. We will publish updates of MEVA on a quarterly basis.
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