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Aug 04 - 12:55 PM

EUR/USD, USD/JPY:  FX Pairs Usually Mean-Revert To Equilibrium Over Time - BofA

By eFXdata  —  Aug 04 - 10:45 AM

Bank of America Global Research notes that G10 currencies have the tendency to mean-revert when they reach extreme levels.

"When EURUSD reached below 1.00 in the past, the pair on average saw a sharp rally over the next two years (Exhibit 4). Vice-versa, EURUSD saw sharp declines when it went above 1.32. The mean-reverting behavior has held for the JPY as well. USDJPY had sharp rallies when it touched below 85 and sharp sell-offs when it rose above 112 (Exhibit 5)," BofA notes. 

"These mean-reversions occurred despite the USD having always had a persistent positive interest rate spread vs the EUR and JPY over the past two decades. Because G10 FX spot prices tend to have sharp reversals at extreme levels, it is more imperative for non-US corporations with US operations to hedge the current USD strength via long-dated forwards now, in our view," BofA adds. 

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Source:
BofA Global Research

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