Monday, November 17, 2008

British pound comes back to earth

For a change of pace, here's another look at how currency values are becoming more reasonable. I've done this for the Canadian and Australian currencies, and now for Sterling. I've been keeping track of major currencies and their purchasing power parities (PPP) for decades, and I am always happy when the PPP I have calculated ends up being the central tendency for the currency itself over time. PPP doesn't work on a short-term basis, and it doesn't always help you predict the direction of currencies, but it really can give you a good measure for how cheap or expensive a currency is at any given point in time. I've spent a lot of time in the UK over the past 15 years, and most of the time London has been expensive from my perspective. Things are now more reasonable with the pound trading at $1.50.

The larger theme with currencies and commodities that I have been talking about is that most of them were trading at pretty high levels not too long ago, and now they have suffered significant corrections. But rather than becoming cheap, I think it's the case that they are now no longer expensive. The valuation extremes have all but disappeared from commodities and currencies. The big extreme remaining to be corrected is the undervaluation of corporate bonds and stocks.

2 comments:

Chandler said...

Thanks Scott.Your site is a "must read "every day

Scott Grannis said...

Thanks!