- The DEER Strategy recommends longs in JPY, CAD, and GBP, and shorts in USD, CHF, and EUR.
- The strategy posted a return of -0.2% over the last 3 months.
- A March SNB rate cut suggests that the SNB could restrain CHF strength.
- Unconfirmed JPY market interventions in April-May could keep overt JPY weakness in check.
- In Asia ex-Japan, CNY, MYR, and KRW are most under-valued, while PHP remains most over-valued.
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Latest G10 DEER valuations
Across major G10 FX, the JPY and CAD are the most under-valued, while the GBP is the least over-valued. The JPY is now well below break-even exchange rate levels for most Japanese firms, contributing positively to profits. CAD and GBP had also seen modest weakness against the USD.
USD, CHF, and NZD remain three most over-valued among major G10 currencies. The USD’s over-valuation has widened slightly with the USD firming across the board this year. CHF overvaluation has narrowed sharply on the back of an SNB rate cut, but remains significant.
DEER Strategy Recommendations
Our DEER strategy retains longs in JPY, CAD, and GBP. JPY is the worst G10 performer this year, with its under-valuation becoming deep enough to trigger unconfirmed market interventions by Japanese authorities in late April-early May. Prior to this, Japan, Korea, and the US had also made a trilateral ministerial joint statement acknowledging serious concerns over the sharp depreciation of the JPY. Given elevated official concerns, a risk of intervention could restrain against more overt JPY weakness. Meanwhile, the BOJ had shifted away from negative rates and ended its yield curve control (YCC) target in March. Amid rising wages, the BOJ’s next policy move is still likely to be a rate hike, though the timing remains uncertain. This could see the short-term US-JP rate differential turning less negative, particularly if the Fed cuts rates.
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