Kathrein Currency Model
The short-term Kathrein EUR/USD Model is a combination of trend following indicators and the expectation for short-term interest rates.
The following graphic illustrates the development of the euro versus the U.S. dollar as well as the respective status of the model for the first quarter 2012. During times of positive cash to assets ratio, the model recommended purchasing euros, while during times of negative cash to assets ratio the model signals purchasing U.S. dollars.
Long-term USD model (Purchasing Power Parity / PPP)
Purchasing power parity states that the same goods must have the same price in various currencies, otherwise market forces would equalize prices and exchange rates. With identical bundles of goods, different rates of inflation would ultimately affect the exchange rates. A country that has a sustained 10% higher inflation rate would have to depreciate its currency by 10% for its traded-goods to regain equal purchasing power. Reality is not as exact as the purchasing power parity theory assumes, but extreme deviations from the nominal exchange rate provide good signals for a period of about two to three years.