They are the levels of FOREX justified by the PPP?
The uncertain economic panorama of the last months has originated a great movement search of refuge in the currency market. This new tendency has been based mainly on the repatriation of capital, having left the currencies of high risk in long ago popular the emergent markets and “carry trades” (the most usual era to get into debt itself in yens to realise investments in currencies with a type of interest superior).
This new current has contributed to the reached record of volatileness during the crisis, and has been in the appreciation of the American dollar (USD) and the Japanese yen (JPY) mainly, to the detriment of currencies of “high risk” like the Canadian dollar, the Australian or the New Zealander. Since the aversion to the risk always brings with himself an important reduction of the flow of capitals, it is possible that in the present economic context the currencies revert at their levels PPP of long term?
As or we commented in Speculating with currencies, the theory of the PPP (purchasing price parity or parity of the spending power) is one on the attempts to determine a datum point which the currencies lack. This theory establishes that the types of change are determined by the relative prices of similar baskets of goods, and therefore anticipates that the changes in the rates of inflation are compensated by equal but opposed changes in the types of change. Thus, the currencies would have tender towards a level where the real price of the things is the same in all the countries, that is to say, if the goods and services are too expensive in a country, its currency would have to fall in the long term (and vice versa).
Taking the classic example from hamburgers and the famous index Big Mac, if a hamburger costs 4 dollars in the United States and 2 pounds in the United Kingdom, then in agreement with theory PPP, the type of change GBPUSD it must be of two dollars by each British pound. If the type of change of market were $1.7 by pound, then the pound would be undervalued and the overvalued dollar.
Under the recent conditions of extreme volatileness and lack of liquidity, it can be instructive to throw a look to the value that would have currencies if their movements were determined exclusively by the dealt goods. It is clear that in surroundings of recession at world-wide level, the commerce of goods is seen directly affected, but this is something that does not affect the comparisons by PPP, since the determining factor is the level of prices within each local economy.
The Organization the International of Cooperation and Economic Development (OECD by its abbreviations in English) has published the types of change PPP recently. Next one is to a table with different currencies from the countries of the G10 and their values in PPP compared with the rate of change of the market (to day of today), using the USD like reference:
