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Asian Macqro forecasts
PPP and forex undervaluation
Slower growth in CY11
This report contains detailed forecasts for the economies that we cover across
Asia, and the latter section sets out the prospects for individual economies. In
most cases growth should slow significantly in CY11–12 after the post-crisis
rebound of 2009–10, but it will need continued policy tightening to limit inflation
risks, with commodity prices adding to uncertainty.
Growth has begun to slow again
The path of recovery has become more uneven in recent months, with a sluggish
patch from mid-CY10 followed by reacceleration towards the end of the year and
into CY11. That growth surge seemed to be mainly the result of a convergence
of some temporary factors, and recent high-frequency data suggest it has
already started to fade, reflecting policy tightening in China, a short-term
technology cycle, and some unusual calendar effects.
PPP-based exchange rate valuations
The release of the latest issue of the Penn World Tables gives us the chance to
present up-to-date calculations of exchange rate misalignment based on
purchasing power parity (PPP), using a process based on the Balassa-
Samuelson (BS) model.
Under this approach we find that the renminbi is undervalued by 28%, the Indian
rupee by 33% and the NT$ by 32%. Conversely, this PPP approach suggests
the Indonesian rupiah is overvalued by 27% partly reflecting the impact of
commodity prices, and the Japanese yen is also badly overvalued
Better than REER
Another implication of the BS approach is that it is not very reliable to look at the
deviation from the historical average real effective exchange rate (REER) as a
measure of over- or under-valuation, as this will be trending higher or lower over
time, depending on the stage and pace of development.
But FEER can be useful
Another approach is to calculate the fundamental equilibrium exchange rate
(FEER), which is a rate that is indefinitely sustainable on the basis of existing
policies. As with PPP-measures, they do not necessarily imply a rapid shift
towards equilibrium.
Impact from end of QE2
Fed balance sheet expansion should have been a factor in holding down the
value of the US$, and we see it strengthening moderately against yen and euro
over the coming year. However, Asian economies are growing faster and are
well ahead in the monetary tightening cycle, which should produce appreciation
against the US$, especially as many are starting from undervalued levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asian Macqro forecasts
PPP and forex undervaluation
Slower growth in CY11
This report contains detailed forecasts for the economies that we cover across
Asia, and the latter section sets out the prospects for individual economies. In
most cases growth should slow significantly in CY11–12 after the post-crisis
rebound of 2009–10, but it will need continued policy tightening to limit inflation
risks, with commodity prices adding to uncertainty.
Growth has begun to slow again
The path of recovery has become more uneven in recent months, with a sluggish
patch from mid-CY10 followed by reacceleration towards the end of the year and
into CY11. That growth surge seemed to be mainly the result of a convergence
of some temporary factors, and recent high-frequency data suggest it has
already started to fade, reflecting policy tightening in China, a short-term
technology cycle, and some unusual calendar effects.
PPP-based exchange rate valuations
The release of the latest issue of the Penn World Tables gives us the chance to
present up-to-date calculations of exchange rate misalignment based on
purchasing power parity (PPP), using a process based on the Balassa-
Samuelson (BS) model.
Under this approach we find that the renminbi is undervalued by 28%, the Indian
rupee by 33% and the NT$ by 32%. Conversely, this PPP approach suggests
the Indonesian rupiah is overvalued by 27% partly reflecting the impact of
commodity prices, and the Japanese yen is also badly overvalued
Better than REER
Another implication of the BS approach is that it is not very reliable to look at the
deviation from the historical average real effective exchange rate (REER) as a
measure of over- or under-valuation, as this will be trending higher or lower over
time, depending on the stage and pace of development.
But FEER can be useful
Another approach is to calculate the fundamental equilibrium exchange rate
(FEER), which is a rate that is indefinitely sustainable on the basis of existing
policies. As with PPP-measures, they do not necessarily imply a rapid shift
towards equilibrium.
Impact from end of QE2
Fed balance sheet expansion should have been a factor in holding down the
value of the US$, and we see it strengthening moderately against yen and euro
over the coming year. However, Asian economies are growing faster and are
well ahead in the monetary tightening cycle, which should produce appreciation
against the US$, especially as many are starting from undervalued levels.
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