Most USD estimates unchanged
Since our June update, the MEVA estimates for all USD crosses are basically unchanged. Thus, EUR/USD is still undervalued, with MEVA suggesting 1.27 as a fair medium-term value. Amid political risks in both the US and euro area, and uncertainty regarding monetary policy by both the Fed and ECB, this is in line with our forecast, as we see EUR/USD moving to 1.18 in 12 months. The MEVA estimate for GBP/USD is still 1.65 and given the large depreciation of GBP after Brexit, MEVA suggests that the GBP is very undervalued. There have, however, not been many data releases post Brexit and as such the MEVA model will take time to capture the effect of the UK's decision to leave the EU.
EUR/SEK and EUR/NOK estimates move higher
MEVA now suggests 9.33 as a fair value for EUR/SEK and the move higher in EUR/SEK over the past months therefore seems overdone from a fundamental viewpoint. The MEVA model thus suggests that the weakening of the SEK, which followed some disappointing Swedish data releases, has been excessive, and a stronger SEK is justified fundamentally. The EUR/NOK MEVA estimate has again moved quite a lot and is now 9.89, suggesting that the NOK is fairly overvalued given the recent move lower in EUR/NOK. As mentioned in the previous MEVA update, the OECD (Organisation for Economic Co-operation and Development) revised its terms of trade data for Norway quite dramatically in June, given the low oil price in the first months of the year. As it has not made any updates since June, the MEVA estimate for EUR/NOK still depends on terms of trade for Norway based on a continued low oil price. Therefore, we advise to not put too much emphasis on the exact estimate but to use the signal qualitatively, seeing potential for the NOK to weaken.
Large correction potential in CHF and CAD
The CHF remains overvalued according to the MEVA model, which suggests that EUR/CHF should move towards 1.28 and thus above the old floor of 1.20 removed in January 2015. Both the terms of trade and the Balassa-Samuelson effect have moved in favour of the EUR versus CHF for a long time, explaining the overvalued signal of the MEVA model, since the spot has not moved accordingly. The MEVA estimate of USD/CAD is roughly unchanged at 1.23, still suggesting that a move lower is warranted. This is due mainly to the Balassa-Samuelson effect moving in favour of the CAD recently, after worsening at the beginning of the year.
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