JPY: USD/JPY High Relative To Simple Fair Value, But Short Of Recent Extremes
We saw further jawboning around FX from Japan's Chief Cabinet Minister earlier. Kihara expressed concern around the recent sharp one-sided movements in the exchange rate and noted FX markets should reflect fundamentals. Kihara's comments echo those of other Japan officials recently, which point to increased concern around FX moves, but appear to stop short of warning of imminent intervention (of course for intervention to be successful the authorities arguably wouldn't give strong pre-warning). A simple short term fair value model of USD/JPY suggests current spot levels are getting stretched relative to fair value, but we remain within extremes seen in recent years.
- The chart below plots USD/JPY against the simple fair value estimate, which has two inputs, the US-JP 2yr swap rate differential and global equities. For the past few years this has an R^2 of just over 81%.
- At present the fair value estimate is closer to 150.00 and is diverging in terms of directional trends in spot, as US-JP yield differentials haven't tracked higher, while global equities also saw risk off recently (although that trend is likely to improve post the Nvidia results from this morning.
Fig 1: USD/JPY Spot Versus Simple Fair Value
Source: Bloomberg Finance L.P./MNI
- The second chart below plots deviations in spot and this fair value estimate in percentage terms. The shaded areas indicate intervention months. Positive readings indicate USD/JPY spot is above fair value and vice versa for negative readings. We are currently around 4.8% above fair value. This is elevated but we have seen more extreme episodes in recent years.
- As the shaded areas on the chart indicate, intervention periods are associated with a positive valuation gap, but the thresholds have varied. This makes sense from the perspective that other factors are also in play, such as USD/JPY levels and also rate of change in the pair.
- On the rate of change front, the 1 month USD/JPY gain is around 3.15%, 3 month at 6.75%. Again we are getting more stretched relative to history but remain short of extremes seen in recent years.
- Still if divergences grow with fair value further, particularly if we approach the 160.00 area, market fears around intervention are only likely to become more heightened.
Fig 2: USD/JPY Deviation From Simple Fair Value & Intervention Episodes
Source: Bloomberg Finance L.P./MNI
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Figure 1: RBA-Dated OIS – Cash Rate Vs. Priced Change Next Meeting
Source: Bloomberg Finance LP / MNI
