DBS Equilibrium Exchange Rates (DEER)

Track currency valuation; get trade ideas. We provide analytics for 8 major currencies.

Analytics Manager

Chang_Wei_Liang

The DBS Equilibrium Exchange Rates (or DEER) indicate fair values for global currencies relative to a trade-weighted currency basket.

The Canadian Dollar (CAD) has dipped in the face of Trump's threat to impose tariffs on Canada and Mexico, with its valuation falling to the lowest since May 2017. Canada's economy is vulnerable to US tariffs, given that its trade with the US comprises over 30% of Canada's GDP. While Canada's oil exports will be less affected due to a smaller tariff, its auto sector could see a significant fallout, being highly integrated with the US. CAD undervaluation may linger given trade tensions, but US-Canada-Mexico negotiations are ongoing, and the final tariff outcome may not be quite as bad as feared. US Treasury Secretary Bessent had said that if Canada and Mexico were to match US tariffs on China, it would be a good starting point.

The Euro's (EUR) overvaluation has steadily narrowed since August 2024, in line with the ECB implementing a series of consecutive rate cuts in Sep, Oct, Dec 2024, and Jan this year. With the ECB set to follow up with another rate cut in March to lower the deposit rate to 2.50%, there is still scope for the EUR's slight overvaluation to compress further. Structural weakness in the economy, heightened export competition from China, the risks of US tariffs, as well as geopolitical uncertainty given the lack of US commitment to Ukraine under Trump, are all weighing on EUR sentiment.

Latest update: 28 February 2025

Our DEER fair value methodology is based on three economic fundamentals:

 

  1. Inflation differentials
  2. Productivity differentials
  3. Terms of trade differentials

 

A country with slower inflation, higher productivity, or higher terms of trade relative to its trading partners should see its currency strengthen (and vice-versa). Data are sourced from the IMF, CEIC, and DBS Research.

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The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

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