Yen A Buy Against Dollar and Euro Says CA's FX Model

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Crédit Agricole's bespoke short-term trading model is buying the Japanese Yen against the Euro and Dollar this week thanks to a sizeable deviation in the Yen's value to short-term fair value.

Crédit Agricole's FX strategists find Dollar-Yen's fair value rose from 145.62 to 147.45 due to a higher U.S.-Japan short-term rates spread and stronger Japan equities.

At the time of writing on Monday, the Dollar-Yen exchange rate is quoted at 151.72.

Lower oil prices and a drop in the U.S.-Japan box yield spread limited the exchange rate's rise in fair value.

"USD/JPY’s overvaluation has increased to nearly 2 standard deviations. So, the FAST FX model has triggered another sell USD/JPY trade with a stop-loss of -1.01% and a take profit level of 147.4537," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Above: "For a stable regime – the primary model is used whereby trades are triggered when the z-score is greater than 1.5 or less than -1.5; while for an unstable regime – the secondary model is used and the trigger level is +/-2 for the z-score" - Crédit Agricole.

Crédit Agricole's Financial Asset Short-Term (FAST) FX model estimates FX fair values based on co-integrating relationships between G10 exchange rates and their short-term financial fundamentals.

It uses significant deviations from these fair values to enter trades in a simulated portfolio.

Meanwhile, Euro-Yen's fair value has increased from 155.06 to 157.37 due to a rise in the Eurozone-Japan short-term rates differential and a fall in the European peripheral bond yield to Bund yields spread, according to Crédit Agricole.

"EUR/JPY is still more than 2 standard deviations overvalued. So, the FAST FX model has triggered another short EUR/JPY trade with a stop-loss of -1.25% and a take profit level of 157.3662," says Marinov.