The DBS Equilibrium Exchange Rates (or DEER) indicate fair values for global currencies relative to a trade-weighted currency basket.

The Japanese yen (JPY) remains significantly undervalued despite earlier joint US-Japan FX market interventions and the BOJ's 25bps rate hike in September. Markets were disappointed by the BOJ's reluctance to signal a faster pace of of rate hikes. Moreover, the decision to hike was not unanimous, with two board members dissenting from the decision. The JPY weakened following the policy announcement, before stabilizing after the Japanese authorities conducted a rate check, which is a move widely viewed as a precursor to FX intervention.

BOJ Governor Ueda has stated that the BOJ is not conducting monetary policy to control the currency, and we agree that rates are generally a blunt tool to address excessive currency weakness. This raises the question of how Japan can further strengthen the credibility of its support for the undervalued JPY. Having accumulated USD 1trn worth of FX reserves through efforts to curb JPY strength in the past, Japan has substantial capacity to intervene. A measured reduction of excessive FX reserves through market interventions could provide a policy-consistent signal that the authorities view JPY weakness as excessive, while allowing the BOJ room to manage policy normalization at a pace dictated by economic conditions.

The Canadian dollar (CAD) is the second most undervalued amongst major currencies. CAD faces multiple headwinds, including escalating trade tensions with the US. On 22 August, the US imposed a 50% tariff on CAD27.6bn of Canadian goods. Canada responded with reciprocal measures, imposing its own tariffs ranging from 15% to 50% on the same value of US goods. At the same time, the BOC has yet to join major central banks in hiking rates this year. While the BOC highlighted upside risks to its inflation forecasts due to rising energy prices, it also noted increased uncertainty due to the new tariffs. In a bid to reduce its economic dependence on the US, Canada is now exploring associate membership with the EU. While details and benefits of such a membership are unclear, it could strengthen EU-Canada ties in areas including trade, defense, and research, thereby supporting Canada's longer-term economic integration with the EU.