News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
EUR/USD
Bullish
Oil - US Crude
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Wall Street
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Mixed
GBP/USD
Bullish
USD/JPY
Mixed
More View more
Real Time News
  • GDP (Gross Domestic Product) economic data is deemed highly significant in the forex market. GDP figures are used as an indicator by fundamentalists to gauge the overall health and potential growth of a country. Learn use GDP data to your advantage here: https://t.co/Yl9vM7kO6a https://t.co/3f5sLijsVB
  • The Federal Reserve System (the Fed) was founded in 1913 by the United States Congress. The Fed’s actions and policies have a major impact on currency value, affecting many trades involving the US Dollar. Learn more about the Fed here: https://t.co/ADSC4sIHrP https://t.co/PO93mIKAZP
  • Technical analysis of charts aims to identify patterns and market trends by utilizing differing forms of technical chart types and other chart functions. Learn about the top three technical analysis tools here: https://t.co/KDjIjLdTSk https://t.co/CHE6IOq3K5
  • The ISM manufacturing index plays an important role in forex trading, with ISM data influencing currency prices globally. Learn about the importance of the ISM manufacturing index here: https://t.co/Xr3xtoFpZy https://t.co/Agl1q6EQyu
  • Take a closer look visually at the most influential global importers and exporters here: https://t.co/G58J1dg6y3 https://t.co/UmubxiDXGc
  • Trading bias allows traders to make informative decisions when dealing in the market. This relates to both novice and experienced traders alike. Start learning how you may be able to make more informed decisions here: https://t.co/rz7fqhRoMG https://t.co/e4G1gTGhex
  • Greed is a natural human emotion that affects individuals to varying degrees. Unfortunately, when viewed in the context of trading, greed has proven to be a hindrance more often than it has assisted traders. Learn how to control greed in trading here: https://t.co/kODPAfJE79 https://t.co/pS48NIuwqX
  • Forex liquidity makes it easy for traders to sell and buy currencies without delay, and also creates tight spreads for favorable quotes. Low costs and large scope to various markets make it the most frequently traded market in the world. Learn more here: https://t.co/arxYmtQeUn https://t.co/gFVVZTGbe1
  • Forex quotes reflect the price of different currencies at any point in time. Since a trader’s profit or loss is determined by movements in price, it is essential to develop a sound understanding of how to read currency pairs. Learn how to read quotes here: https://t.co/CNtqrKWDBY https://t.co/nHXiNJhLes
  • A currency carry trade involves borrowing a low-yielding currency in order to buy a higher yielding currency in an attempt to profit from the interest rate differential. Find out if the carry trade suits your trading style here: https://t.co/7t4BzmLg8w https://t.co/h0TmJcZeqr
Chinese Yuan Still Undervalued According to Purchasing Power Parity

Chinese Yuan Still Undervalued According to Purchasing Power Parity

Ryan Cox,

Talking Points:

  • The People’s Bank of China moved to loosen the Yuan fix, and saw the currency drop in response
  • A number of currencies are ‘under-valued’ compared to the USD according to the Big Mac PPP
  • Rate changes and central bank stimulus programs have helped push rates from over- to under-valued

The Chinese Yuan (CNY) has seen a series of daily declines resulting from actions by the People’s Bank of China this past week. This has in turn revived the debate of exchange rates providing unfair trade advantages. Yet, looking at the comparisons, the Yuan isn’t the only one.

Chinese Yuan Still Undervalued According to Purchasing Power Parity

The Big Mac Purchasing Power Parity index is a useful benchmark for measuring the relative fair values of currencies. For the exchange of goods between two countries to have equivalent purchasing power there needs to be an adjustment to the exchange rate. These adjustments occur through market forces and can be explained through the theory of purchasing power parity. Although exchange rates adjust between currencies the purchasing power of one currency still be qualitative and perhaps even quantitatively over- or under-valued relative to another. In the chart below we see the value of the Yuan and major currencies compared to the USD according to the Big Mac PPP Index.

Chinese Yuan Still Undervalued According to Purchasing Power Parity

The undervalued level for most of these currencies compared to the USD can potentially be attributed to a number of factors. However, one stands out prominently: expansive monetary policies implemented by their central banks. The Bank of Japan, the People’s Bank of China, and the European Central Bank in particular moved from rate cuts to unorthodox stimulus programs to revive growth and inflation in their economies. While these central banks pursue easing policies, the Fed is inching closer to a possible rate hike; and the divergence this is developing can be seen through relative value.

In the chart below of historical data from the Big Mac index we can see the Euro and the Japanese Yen both pushed deeper into under-valued territory versus the US currency as their efforts pursuit of accommodative policy escalated.

Chinese Yuan Still Undervalued According to Purchasing Power Parity

The monetary policies of these central banks and especially the multiple devaluations of the Yuan by the Peoples Bank of China have fueled an ongoing debate as to the motives behind their actions – perhaps implementing policy for FX impact explicitly and procuring an ‘unfair advantage’. The trade advantages of a devalued currency – especially against the USD which is the world’s largest consumer economy – can be economically stimulative for a country’s exports. Yet, intention is everything, and most say a competitive exchange rate is not their objective – including the PBoC.

While Purchasing Power Parity does not give a definitive assessment of a currency’s over- or under-valuation versus its counterparts and it certainly cannot prove intention; many will continue to use it as evidence of both.

Macroeconomic events affect currency valuations. Stay updated with major releases on our calendar.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES