The Euro Is Overvalued
One of our major themes here at The Macro Trader over the past two years has been to short Europe. We mean that in a general sense as we have been short Spain and Italy off and on for over a year and are bearish on most things EU relative to most of the world. One area that we have been looking at a lot lately is that of the Euro.
After being overvalued by 40% back in March of 2008 the Euro fell about 20% as investors went into risk aversion mode and bought the US Dollar. Since March of this year the Euro has once again climbed into wildly overvalued territory again and is currently about 35% overvalued. As you can see in the chart below when the Euro gets very far above or below the 20% bands it has a relatively sharp tendency to revert to the mean. (Click on chart twice to enlarge)
EUR/USD PPP Chart
Our view is that sometime in the next few months we will have a modest US Dollar rally as investors leave the Euro. In fact this is one of the primary reasons why we think that gold has been working out so well. Basically the EUR, USD, and JPY are all really weak and investors are doing anything possible to diversify out of them.
One tool that we use a lot to gauge our timing in regards to trading currencies via PPP valuations is that of the different volatility indexes. While you can monitor the EVZ Euro VIX, we also look at the JP Morgan G-7 VIX so to help us gauge the risk aversion in other G-7 currencies as well. Right now this is important as there are several currencies overvalued by 20% or more, but that is for another post. Anyways as you can see in the chart below the JP Morgan G-7 VIX is at relatively low levels and is showing little sign that anything is happening yet. (Click on chart twice to enlarge)
JP Morgan G-7 VIX
Happy Trading,
Disclaimer-The Macro Trader is currently not short the EUR/USD but that will change at some point.
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Title: The Euro Is Overvalued
URL: http://www.themacrotrader.com/2009/11/13/euro-is-overvalued/
