PPP Model – Swiss Franc (CHF) overvalued vs EUR, EUR undervalued vs CHF

CHF-overvalued-vs-EUR

This chart was published today by BofA ML, showing the Swiss Franc (CHF) overvalued by approx. 5% vs EUR.

From wikipedia:

PPP exchange rates can be useful for making comparisons between countries because they stay fairly constant from day to day or week to week and only change modestly, if at all,from year to year.  Second, over a period of years, exchange rates do tend to move in the general direction of the PPP exchange rate and there is some value to knowing in which direction the exchange rate is more likely to shift over the long run.

Quote from BofA ML report:

Countries can go on for years with an overvalued currency. Indeed, equilibrium
estimates are supposed to be the steady state to which the exchange rates
converge in the very long term.

 

Sidenote relevant for CIIA exam:

What is the difference between PPP and the ‘Law of One Price’:

The law of one price applies to individual commodities whereas PPP applies to the general price level.

source: wikipedia

Leave a Reply

Your email address will not be published. Required fields are marked *