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The World Price Index

Released: October 11, 2016
Sterling Plummets to 13% Undervaluation
on Post Brexit Vote Jitters

  • Sterling’s fall allows British exports to become more competitive than Germany’s
  • Chinese Yuan achieves reserve status despite 22% undervaluation
  • Turkish Lira falls to 38% undervaluation on debt downgrade

The World Price Index (WPI) data for October shows that a rate of £1 to US$1.27 sterling is 13% undervalued against the dollar in purchasing power parity (PPP) terms. This 6% fall on September follows uncertainty over whether or not the UK is going to experience a ‘hard’ or a ‘soft’ Brexit from the European Union. Also the Chinese Yuan has not seen a pick-up in demand despite its recognition as an official reserve currency and remains undervalued by 22%. The Turkish lira’s undervaluation reached a low point after Moody’s cuts the government’s debt rating.

Hard Brexit fears hit Sterling
Fears that Britain’s negotiations to leave the European Union will not go smoothly leading to a hard Brexit have unsettled foreign exchange markets: a currency market rate of one US dollar to £0.79 compared to a WPI rate in October of one dollar to £0.69. At this rate sterling has finally become more competitive in PPP terms, undervalued by 13%, than a German Euro which in October was undervalued by 12% down from 11% the previous month. The Chancellor of the Exchequer in the UK has publically stated that he sees no difference between a ‘soft’ Brexit where a favourable access deal to the single market is negotiated and a ‘hard’ Brexit where the UK reverts to World Trade Organisation rules. Nevertheless, foreign exchange traders remain uncertain about the correct value for sterling.

China’s currency remains highly undervalued
In October, the Chinese Yuan remained undervalued by 22% in PPP terms, effectively unchanged on the previous month, despite its official inclusion into the IMF’s basket of reserve currencies. On October 1st, China’s currency was finally included in the IMF’s Special Drawing Right (SDR) with the third largest weighting at 10.92 percent in the basket after the US dollar, 41.73 percent and the Euro, 30.03 percent. In October, one US dollar bought Yuan 6.68 in the foreign exchange market, but the WPI rate was one dollar to Yuan 5.18. The degree of undervaluation has not been affected so far by its new reserve currency status, ahead of the Japanese Yen with a weighting of 8.33 percent. In contrast, in October one US dollar bought ¥102.9 against a WPI rate of one dollar to ¥125.5 implying an overvaluation of 22% in PPP terms. Since the SDR accounts for around 3% of global currency reserves this should lead to additional purchases of Chinese government bonds, but the impact of this is being diluted by continual capital outflows induced by fears about the weakness of the Chinese economy and its rising burden of debt. Chinese official balance of payments data for the second quarter of 2016 show that Chinese residents non-portfolio outflows of capital rose from US$29 billion to US$81 billion.

Turkish Lira falls on debt downgrade
In October, the Turkish Lira fell to an undervaluation in PPP terms of 38%, its weakest level in over a year. Political repression, a weakening economy and a downgrade of government debt by Moody’s to ‘junk’ status at the end of last month, have all weakened the Turkish currency. In October, one US dollar bought ₺3.01 compared to ₺2.93 the month before and to a current WPI rate of ₺1.90.

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.




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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