- The DEER Strategy recommends longs in JPY, CAD, and AUD, and shorts in USD, CHF, and EUR.
- The USD has been buoyant due to tariff risks, posing a drag to overall returns.
- JPY may be an outperformer amid risk aversion, and lower dependence on US trade.
- CAD undervaluation may linger as Canada braces for tariff shocks.
- CHF may slip further given SNB rate cuts, while the Swiss economy is also dependent on US trade.
Below is a summary; for full report and detailed charts, please download the PDF
Latest G10 DEER valuations
Across major G10 currencies, JPY and CAD remain the most under-valued. JPY’s undervaluation has been little changed. With Japan’s headline inflation rebounding above 3%, the BOJ has finally hiked rates for a second time in January, providing support to the JPY. The CAD’s valuation has slipped to its lowest since 2017, weighed by fears of a trade war and escalating tariffs between Canada and the US.
AUD, NZD, and EUR are near their long-term fair values. GBP trades slightly above fair value, supported by one of the highest short-term interest rates amongst major currencies.
USD and CHF still stand as the two most over-valued. The USD’s over-valuation has expanded again, as markets expect lesser Fed rate cuts due to inflation risks from potential Trump tariffs. CHF has softened a tad after SNB cut rates by an outsized 50bps in Dec, and it is now the least over-valued since May 2024.
DEER Strategy Recommendations
Our DEER strategy continues to hold longs in JPY, CAD, and AUD. The Strategy is also maintaining GBP long for up to 2 more quarters.
Trump’s imposition of a 25% tariff on Canadian and Mexican goods (and 10% of Chinese goods) marks the start of a trade war that is likely to hit risk sentiment and hurt the US and global economies. FX markets will be impacted too, as tariff shocks are transmitted across financial and trade channels.
Risk aversion amid trade tensions could catalyse an unwind in carry trades. This should be positive for the JPY, which is a widely used funding currency. On trade, Japan itself is not directly vulnerable to US tariffs, though Japanese auto companies with production in Mexico could face losses. Japan’s total exports to and imports from the US amount to just 5.6% of Japan’s GDP in 2024. Compared to others, Japan should be better insulated to US trade tensions, implying a degree of JPY resilience. Furthermore, the BOJ had upgraded its inflation outlook and hiked its policy rate to 0.50% in January, which should support the JPY.
In contrast, the Canadian economy is highly vulnerable to US tariffs, given that trade with the US comprises over 30% of Canada’s GDP. While Canada’s oil exports are less affected due to a smaller 10% tariff, its auto sector will see a significant fallout, being highly integrated with the US. PM Trudeau has also announced a retaliatory 25% tariff on a targeted US$155bn of US goods. CAD undervaluation may linger for now, but Canada may be able to address US complaints over the flow of illegal drugs that had led to the tariffs. An early start to the renegotiation of USMCA could also stabilize CAD sentiment further out.
AUD is highly risk-sensitive, and Australia’s significant exposure to Chinese demand implies that Trump’s 10% additional tariff on China could in turn weigh on short-term AUD sentiment. But Australia’s direct trade links with the US is quite small at around 2.7% of GDP, so AUD could recover if China embraces stronger fiscal support measures in the face of US tariffs.
The Strategy retains shorts in USD, CHF, and EUR. The USD has been buoyant as markets priced in tariff increases and more restraint in Fed rate cuts. But this also means that the USD is now highly over-valued, contrary to Trump’s wishes for a weaker USD to bolster exports and attract investment. USD strength could be sustained in the short-term amid trade tensions, though this could reverse if US growth eases due to the heavy burden of tariffs.
CHF overvaluation remains high despite four consecutive SNB rate cuts since March 2024, including an outsized 50bps cut in December. CHF has joined JPY in having the lowest interest rate across major currencies. But Switzerland is more vulnerable to US tariffs, as total trade with the US comprises over 11% of Swiss GDP. A universal US tariff under Trump could thus weigh more on the overvalued CHF.
EUR’s valuation is not too high, but its yield remains amongst the lowest. The ECB has cut its deposit rate to 2.75% in January, with Lagarde saying that the economy is likely to remain weak in the near-term. European political uncertainty, on top of possible US tariffs, should continue to weigh on EUR sentiment.
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