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IMF Warns Pound Overvalued. What About Other Currencies?

  • Written by Syndicated Publisher No Comments Comments
    July 31, 2014

    Is the British pound overvalued? What about the Euro? The US Dollar? The Yen?

    Curiously, economists make that case for all of those currencies.

    And today, the IMF is pounding the drums with this proclamation “Overvalued” Pound Prevents Rebalancing.

     The International Monetary Fund warned on Monday that the pound was “overvalued” and preventing the rebalancing of the economy away from a reliance on spending and imports.

    In its annual assessment of the UK economy, the fund said sterling was between 5 and 10 per cent overvalued because of a “lack of competitiveness and limited export diversification”.

    “Staff estimates that the current account balance is 2.6 per cent weaker than its equilibrium level, and that the real exchange rate is overvalued by about 5–10 per cent,” the IMF said.

    Equilibrium Level Madness

    Apparently the IMF is the arbiter of the “equilibrium level” of any and every currency. A few examples will prove the point.

    New Zealand Dollar Overvalued by 20%

    On April 10, 2014 the IMF warned New Zealand Dollar May Be Overvalued.

    Canadian Dollar Overvalued by 10%

    On March 2, 2014 the IMF Warned Canadian Dollar Overvalued by 10%” despite recent depreciation, thus the Bank of Canada should wait before hiking rates..

    Australian Dollar Overvalued by 10%

    On November 21, 2013 the IMF Stated Australian Dollar Overvalued by 10%.

    US Dollar Overvalued

    This dates back a while but on October 28, 2010 the IMF said US Dollar ‘Overvalued’ On Currency Markets.

    Swiss Franc Overvalued

    Returning to this year, on March 24, 2014, IMF Suggests SNB Use Negative Rates if Franc Pressured because the “franc remains moderately overvalued.”

    Euro Overvalued

    As shocking as this may seem, I cannot find a recent IMF opinion on the Euro, but on May 8, 2014, Mario Draghi, president of the ECB discussed the Pernicious Effects of an Overvalued Euro.

    I am pretty sure the IMF would agree.

    Yen and US Dollar Overvalued 

    On October 12, 2012, the Wall Street Journal proclaimed If Yen Overvalued in IMF View, So May Be Dollar.

     Japan’s finance minister may have breathed a sigh of relief Thursday when the International Monetary Fund chief reaffirmed the yen is “moderately overvalued,” a phrase traders believe is supportive of potential market intervention to weaken the currency against the dollar.

    Not so well-known in the market, however, is that the 188-member international lender also sees the dollar as “moderately overvalued,” a view that makes it harder to conclude the IMF would endorse future intervention by Tokyo in the dollar-yen market.

    Yuan “Moderately” Undervalued

    On May 29, 2013, and contrary to sentiment in Washington DC that says the Yuan is massively undervalued, The IMF Seeks Flexible Chinese Yuan, Says “Moderately Undervalued”.

    US Dollar Index

    click on chart for sharper image

    Summary

    Note that the US dollar is about where it has been since the beginning of 2012, but higher than it was in October of 2012 when it was judged to be “overvalued”.

    Is it more overvalued today?

    Apparently the British pound, New Zealand dollar, Australian Dollar, the US dollar, the euro, and the yen are all overvalued.

    The yuan is the one major currency that is allegedly undervalued, but only “modestly“.

    Mathematics

    IMF overvalued-undervalued judgments are generally on a basket of currencies basis.

    However, it is not mathematically possible for all those currencies to be 5-20% overvalued against all the other currencies in the same basket.

    Even if it was possible, based on precise timings and currency fluctuations, the idea that the IMF can fine tune currency valuations to the nth degree as it has done is absurd.

    All Currencies Overvalued

    Nonetheless, the IMF appears to be on target with all those “overvalued” assessments, not against  other currencies in the basket or against each other individually, but against gold, and by far greater percentages.

    If you agree with my assessment, and perhaps even if you don’t, please consider How Much Gold Should Someone Own? Where and How To Own It?
    Read more at http://globaleconomicanalysis.blogspot.com/2014/07/imf-warns-pound-overvalued-what-about.html#VAxxBrqjY4qWv36I.99

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.

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