TD Research discusses the current FX market conditions and notes that USD/JPY is getting expensive on the short-term valuation metrics.
"The currency market is a constantly evolving machine that captures and processes information at rapid clips. That's mostly the reason why the main drivers and key market factors sit in a state of flux. Still, throughout the Trump and Brexit era, the one common theme has been the relative focus on growth and equities..Since the trade wars, relative equity performance has dovetailed more closely with broad currency movements than rate differentials. That's partly a function of Trump's awkward macro/micro policy mix," TD notes.
"With USDJPY trading at a 3.5% to high-frequency fair value (HFFV), the rally sits on thin ice. We note that the USD is still closely watching relative equity performance. We dust-off our positioning tracker, highlighting that nearly all major global equity benchmarks look overbought. MSCI US suffers from a mix of frothy valuations and a well-populated long trade," TD adds.