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The World Price Index

Released: August 11, 2015

Canadian Loonie at lowest Dollar valuation as recession looms

  • Canadian Dollar falls to -7.1% as oil prices slide to under $50.
  • Brazilian Real drops to an undervaluation of -12.4% as interest rates rise.
  • Turkish Lira slides to -32.5% undervaluation on political uncertainty.

Canadian Loonie weakens against US$
The latest set of World Price Index (WPI) data for August indicates that the Canadian Dollar fell to an undervaluation of 7.1% against the US Dollar measured in terms of Purchasing Power Parity (PPP). In August, the market foreign exchange rate stood at US$1 to C$1.23, compared to a WPI rate of US$1 to C$1.32, unchanged since May of this year. But despite a similarity in relative prices between the two countries, the Looney has fallen against the Dollar on market exchanges from US$1 buying C$1.20 in May against US$1 to C$1.32 at its current rate. This is the greatest level of undervaluation against the US$ since the WPI survey began.

There are several reasons for this weakness in the Canadian Dollar, most of which are out of the control of policy makers. The energy sector of the Canadian economy has entered a period of painful restructuring with a fall in investment spending as companies have responded to the fall in oil prices since last summer. In addition the decline in other commodity prices that started several years ago has hit output in the non-energy resource sectors. The WPI Surveys show that there is a particularly close relationship between the oil price, as measured by Brent Crude in US$ per barrel and the relative valuation in PPP terms of the Looney against the US$.

This has all had a knock-on impact on GDP and prices. The Canadian economy is facing domestic deflationary pressures. An analysis of the composites of the WPI Survey for July and August shows falling prices in all sectors, but Durables, which are mainly imported and subject to the value of the Looney. Many economists are suggesting that the Canadian economy is already in recession. In response, the Bank of Canada cut interest rates by 0.5% on July 15, the second time this year, producing a negative impact on the currency. In its report the central bank estimated that the economy contracted by 0.6% from January to March and by 0.5% between April and June. The Bank is forecasting a revival in positive growth in Q3 and Q4 of this year, but if this does not happen monetary policy will have to be loosened again. This implies a continuing or even growing undervaluation of the Looney against the Dollar given the rise in rates expected in the US later this year.


Brazil sees sharp rise in undervaluation
The Brazilian Real has been weakening against the Dollar in both PPP terms as a result of problems in the domestic economy and in nominal value because of the rapid deterioration in the terms of trade against the country. In August, one US$1 had a nominal value of Real 3.49 on the foreign exchange markets, but it had a WPI value of US$1 to Real 3.06, indicating an undervaluation in PPP terms of -12.4% this month. The undervaluation in July was only -4.3%, but this is a long way from the overvaluation of 35.3% achieved in September 2014.

Brazil has been hit by low prices for oil and iron ore and is suffering from other weak commodity prices. But there are also domestic factors at work that will impact negatively on the valuation of the Real in PPP terms in the coming months. Brazil is facing a deepening recession as shown by the Sales Managers’ Index, a high and rising public sector deficit, rising inflation and a mistrusted President.


Turkish Lira continues to slide
The Turkish Lira continued to weaken in August with its undervaluation against the US Dollar sliding from -29.3% in July to -32.5% in August. At the market exchange rate one Dollar bought 2.79 Lira, but according to the WPI one Dollar had a PPP value of 1.89 Lira.

The weakness in the Turkish currency had much to do with its current account deficit, but as the economic situation has slowly improved the political horizon has worsened. The backwash from the elections results of June 7 when the AK Party lost its parliamentary majority is still softening the currency. While fresh elections in the coming 12 months cannot be ruled out; there are fears that, Erdogan, the Turkish president, is using military strikes against the PKK to undermine his political opponents and this is impacting on investor confidence.


About the World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons. Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country is provided in the table and chart below.


 









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Notes to Editors
  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released on the 2nd Working Tuesday of each month.
  • Latest month market exchange rates are calculated as an average of daily rates

About The World Price Index
The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.


About World Economics
World Economics is an organisation dedicated to producing analysis, insight and data relating to questions of importance in understanding the world economy. Its parent company Information Sciences Ltd has a long history of the development of key business information today used throughout the world, including the origination of the Purchasing Managers Indexes in Europe and Asia (now owned by Markit), and the development of WARC a global information provider for major corporations .

Currently our primary research objective is to encourage and assist the development of better and faster measures of economic activity. In cases where we believe we can contribute directly, as opposed to through highlighting the work of others, we are producing our own measures of economic activity.

Our work is mainly of interest to investors, organisations and individuals in the financial sector and to significant corporations with global operations, as well as governments and academic economists.

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