Gavekal Capital: Trends Developing In The Forex Market

Friday, November 21, 2014

Trends Developing In The Forex Market

As most investors are aware, there have been some major currency moves recently (looking at you Yen/USD cross). This has established some interesting trends in the forex market. For example, volatility continues to rise off a very low base (unlike in the equity market). In the chart below, we plot the VIX (right-hand scale) against the average 65-day realized volatility of major currency pairs (left-hand scale). Forex volatility has increased to its highest level since November 2013.

Some long-term purchasing power parity relationships have also changed. For instance, the Euro is now undervalued on a purchasing power parity basis against the USD really for the first time since 2012. And the Pound is now undervalued again after spending most of 2014 overvalued.

The Yen is now undervalued against the dollar by the greatest percentage since late 1985.

The overvaluations of the commodity currencies such as the Canadian dollar and the Australian dollar have fallen substantially. The Canadian dollar is approximately 5.5% overvalued against the USD on a PPP basis. This is the lowest overvalued percentage since 2009. The Aussie dollar is still 16.5% overvalued but down from 47% overvalued in 2011.

Finally, the nominal and real trade-weighted dollar index are both at five year highs.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
We offer the Gavekal Knowledge Leaders Strategy in multiple products for global investors. For more information about our product offerings please visit http://www.gavekalcapital.com.
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