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Since the middle of July, a little less than 2 months ago, the Euro has lost approximately 1900 pips or close to 12 percent of its value against the US dollar. As the currency continues to slide and comes within a whisker of our 1.40 target, the next question on everyone’s mind is when does the Euro become a value play? Based upon Economist Magazine’s Big Mac Index, which is a rough calculation of purchasing power parity, the Euro does not hit fair value until parity which is one to one with the US dollar. The OECD has a much more comprehensible valuation for the Euro. According to their latest report and the estimates of many economists, the EUR/USD is fairly value at 1.10 to 1.20.Purchasing parity has its flaws because it only compares the price of a specific good or basket of goods and it does not take into consideration the quality of the goods. Nonetheless, understanding what the PPP value of the EUR/USD is allows us to understand how much further the EUR/USD can fall.
Looking ahead, the German trade and current account balances are the most important pieces of economic data on the Eurozone calendar. Given the drop in industrial production and the export component of the purchasing managers’ index, we expect more Euro bearish data.
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