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

The JPY (Japanese Yen) remains extremely undervalued, despite a record USD73bn of JPY buying intervention by the BoJ between late April and May to cap USD/JPY from breaking above 160. The Japanese authorities still have over USD1trn of FX reserves to stabilize the JPY, but interventions may not have a durable impact on the JPY without interest rate adjustments by the BoJ. Thus, markets are eagerly anticipating BoJ's monetary policy meeting on 15-16 June. BoJ Governor Ueda has said in early June that the Bank is wary of second-round effects on inflation from the rise in oil prices, and see rising inflation expectations to be driving a rise in long-end JGB yields. Given the risk of being behind the curve and having to do larger rate hikes that would be disruptive to financial markets, the BoJ is likely to hike its policy rate in June, and guide for further policy normalization. If JPY weakness extends post-BoJ, then the Japanese government may have to step into markets again to support the JPY. Finance Minister Katayama has reiterated that excessive FX volatility is undesirable and that bold actions are permitted under the US-Japan FX statement.

GBP's (Great British Pound) over-valuation is narrowing amid elevated political uncertainty and fiscal risks. PM Starmer could face a leadership challenge from Andy Burnham, who is one of the most popular Labour politicians in the UK and is contesting the Makerfield by-election on 18 June for a parliamentary seat. Burnham has previously favoured exempting defence spending from fiscal rules, and concerns about a leadership challenge had triggered volatility in the Gilt market. While Burnham has since said that he will commit to fiscal rules on borrowing limits, markets are likely to remain sensitive to his rhetoric, particularly given his support for infrastructure investment. The overvalued GBP looks vulnerable to unexpected changes in policy positions and volatility in Gilt markets.