Fair value in USD/JPY – Deutsche Bank

By FXStreet George Saravelos, Strategist at Deutsche Bank, suggests that the Japan’s biggest problem with the current yen rally is that it is justified by fundamentals.

Key Quotes

“Across most of our metrics USDJPY is still expensive or only just approaching fair value. US–Japan real rate differentials have narrowed significantly this year helped by Fed dovishness and the collapse of (actual and expected) inflation in Japan. The good news is that on real rates USD/JPY is close to fair value around 110. The bad news is that on more medium-term frameworks USD/JPY remains significantly overvalued. Taking the average of three Deutsche Bank valuation models (PPP, BEER, FEER), we come up with a USD/JPY equilibrium value of 97, more than 10% below current levels. There are two main implications of this analysis.

First, it is unlikely that Japanese FX intervention is going to be very successful in pushing USD/JPY significantly higher – there is no misalignment to correct in the first place. The very public commitments the G20 have made against competitive devaluations make large-scale, sustained intervention even less likely.

Second, unless the BoJ can convince the market that it is able to bring inflation expectations back up (and real yields down) it is …read more

Source:: FX Street