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

The Japanese Yen (JPY) is facing depreciation pressure after Takaichi was elected as LDP President and is set to become the next Prime Minister. Takaichi is a proponent of stronger fiscal and monetary stimulus, and her win has triggered a knee-jerk sell off in the JPY and Japanese bonds. Nevertheless, she has moderated her tone during her campaign, saying that she would pursue responsible fiscal policy while prioritizing growth, and that the specifics of monetary policy should be left to the BOJ. Could the JPY face a similar degree of depreciation as seen in 2012, when Abenomics-style stimulus was enacted? We think not. The JPY is now highly under-valued based on our DEER metric and is a far cry from 2012 when it was highly over-valued. Scope for JPY weakness is thus small. Also, unlike 2012, Japan is facing more inflation than deflation pressures today. An independent BOJ is more likely to hike rates than cut rates, and it will most certainly not be embarking on 2012-style QQE. Indeed, the BOJ has only recently announced that it will reduce its ETF holdings. Given FX valuation and policy differences compared to 2012, JPY weakness is unlikely to sustain, unless Japan's fiscal credibility is called into question by markets.

The Euro (EUR) has turned quite over-valued, with its DEER valuation now standing at the highest on record. Admittedly, the Eurozone economy is improving, and the ECB has signalled an end to rate cuts. But France is facing difficulties in pursuing fiscal consolidation. The resignation of French PM Lecornu, who have only just replaced Bayrou in September, underscores the high difficulty of a centrist PM in getting support from Socialists and the right-wing National Rally to pass a budget. 'Zucman' wealth taxes are now being floated as a way to plug the budget gap, which underscores the lack of fiscal space more than the progressiveness of French politics. Fitch has downgraded France to 'A+' from 'AA-' in September, and an over-valued EUR now may not quite be compatible with the uncertain French fiscal outlook.