Real effective exchange rates

<body><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td> <font face="garamond, times new roman, times" mstheme> <p> Valuation </p> <p> </p> </font mstheme> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td valign="top" width="1%"><font face="garamond, times new roman, times" mstheme> <p> </p> </font mstheme></td><td valign="top" width="24"></td><td valign="top"> <p>This page uses frames, but your browser doesn't support them. </p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Forex: Valuation</font></strong></p> <p><strong><em><font face="Arial Narrow" size="2" color="#00FF00">Buy when the coloured lines are at the low end of their range, </font><font face="Arial Narrow" size="2" color="#FF0000">sell when they are high</font></em></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">This tool indicates whether currencies represent good or bad value at current exchange rates. It is designed to highlight currency cycles that are ultimately self-correcting owing to lagged effects of the balance of payments on real effective exchange rates, that is to say the trade-weighted exchange rate adjusted for comparative inflation rates, as calculated by PIT. For comparability, exchange rates have been rebased to set year-end 1994 at 100.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">In each chart the currency index is shown as </font><font face="Arial Narrow" size="2" color="#FFFFFF">the thick white line</font><font face="Arial Narrow" size="2" color="#C0C0C0"> on the right hand axis. The main explanatory variable, the real effective exchange rate, shown as </font><font face="Arial Narrow" size="2" color="#FFFF00">the thin yellow line</font><font face="Arial Narrow" size="2" color="#C0C0C0">,  uses the left hand axis. A Best Guess as to the future development of the valuation ratio is also shown on the left hand axis.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Best Guesses, shown</font><font face="Arial Narrow" size="2" color="#FF0000"> as the orange line</font><font face="Arial Narrow" size="2" color="#C0C0C0">,  suggest what would happen to the valuation ratio based on forecasts for inflation both at home and among the main trading partners, assuming constant exchange rates. The base level is the average for the last completed calendar year. Forecasts are based on consensus estimates for inflation, using the weights in the PIT family of real effective exchange rates.</font></strong></p> <p><font face="Arial Narrow" size="2" color="#C0C0C0"><strong>These real effective exchange rates are a set of proprietary indexes calculated by PIT, based on consumer price indexes and mutual trade between all countries in the database using an average of imports and export weights, which have been rebalanced every five years. The most important trading partners are used in the calculation for each country. These include the Euro-Zone countries and up to six other major partners, representing on average some two-thirds of mutual trade. </strong></font></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Please note that owing to structural changes in the economy of a country over time, there may be a misleading tendency for the rate to drift upwards or downwards over the long-term, whereas it should be expected to fluctuate around a horizontal plane. </font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">See also the <a href="ChartFrame_currency_current_account.htm" target="_top">Balance of Payments</a> charts to study in greater depth the cyclical patterns that frequently arise through the J-curve effect on the balance of payments, whereby initial price effects may "justify" and serve to exaggerate the currency movement before countervailing volume effects create offsetting movements up to two years later.</font></strong></p> <p><font face="Arial Narrow" size="2" color="#C0C0C0">Owing to the conversion of legacy currencies into Euros, analysis is provided on the common currency, rather than for individual countries. Trade between members of the Euro-Zone has been excluded. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit</font></p> <hr color="#FF0000"> <p align="center"><font size="2">[ <a href="global_asset_allocation_sitemap.htm" target="_top">Site Map</a> ] [ <a href="index.htm" target="_top">Home</a> ]</font><font size="2" face="Arial"><br> </font><font size="2">[ <a href="Chart_Library.htm" target="_top">Chart Library</a> ] [ <a href="ChartLibrary_foreign_currency.htm" target="_top">Forex Charts</a> ]</font> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td><font face="garamond, times new roman, times" mstheme> <p align="left"><font face="Arial Narrow" size="1" color="#C0C0C0">Copyright © 1999 Professional Investment Tools Ltd., authorised by the Financial Securities Authority. An Independent Financial Adviser. Please read Financial Health Warning and Licence Agreement. UK laws apply exclusively. Principal sources: Consensus Economics, Corel Corp., FIBV, Global Financial Data, PIT, national governments and stock exchanges. Information and opinions are based on sources believed to be reliable and accurate. However PIT does not guarantee this to be the case, and does not accept liability for any loss arising. This is for information only and does not constitute a solicitation to deal in any securities. Opinions are liable to change. Past performance is no guarantee of future success. Last modified: November 02, 2001</font><font face="Arial Narrow" size="2" color="#C0C0C0"><strong>.</strong></font></p> </font mstheme></td></tr></table></body>