Credit Agricole provides insights on the USD/JPY and EUR/JPY valuations, particularly in light of the recent movements in the yen and the potential for interventions by Japanese authorities.
JPY Intervention Watch: With USD/JPY nearing the 145 mark, Credit Agricole notes that during previous occasions near this level, verbal interventions escalated, reaching level 4 out of a possible 7 on their verbal intervention scale. Level 7 indicates warnings of an imminent intervention.
Policy Officials' Warnings: Japanese policy officials have previously warned against erratic volatility in the forex market, asserting that such currency fluctuations did not truly represent economic fundamentals.
USD/JPY Fair Value:
- Credit Agricole’s primary model for determining USD/JPY’s fair value is currently unstable.
- However, their secondary model, which takes into account short- and long-end UST yield movements, estimates that recent yield changes have increased the short-term fair value for USD/JPY from 140.50 to 142.80.
- It's worth noting that these calculations are preliminary, as the model is typically updated with data at the New York close.
- According to these calculations, USD/JPY would only be considered significantly overvalued if it exceeded 146.15.
- EUR/JPY appears to be significantly overvalued based on preliminary estimates.
- The bank's primary model, which is stable for EUR/JPY, suggests that the short-term fair value has marginally increased from 154.17 to 154.46.
- The pair would be deemed significantly overvalued if it surged beyond 157.40.
Credit Agricole is closely monitoring the yen's performance against both the USD and EUR. They emphasize that while the USD/JPY pair is approaching levels where previous verbal interventions have occurred, it isn't considered excessively overvalued yet. On the other hand, the EUR/JPY seems to be trading at a significant premium to its estimated fair value, which could warrant closer attention.