This week’s featured insight is our DBS Equilibrium Exchange Rate (DEER) analysis, tracking long-term valuations across major currencies.
The JPY has rebounded from a record under-valuation in the wake of BOJ's rate hike in July, accompanied by a reduction in the pace of JGB purchases from JPY6trn per annum to about JPY3trn in Q1 2026. Markets have been wrong-footed by the BOJ's determined stance to normalize interest rates. This resulted in a sharp unwind of yen carry trades, bringing USD/JPY down to as low as 142. Going forward, the BOJ's policy position will be closely watched, and uncertainty of the BOJ rate trajectory could restrain markets from returning aggressively to JPY-based carry trades. Furthermore, Japanese politicians have become more averse to a weak JPY. Japan had intervened to support the JPY in April-May as well as July this year, and risks of intervention are heightened if USD/JPY is to trade above 150 again.
CHF is the second most over-valued major currency after the USD. The sharp unwind of carry trades in July had resulted in the CHF strengthening as much as the JPY. Unlike the under-valued JPY, the CHF's overvaluation is now approaching levels seen in Aug 2011, just before the SNB imposed a EUR/CHF price floor to stem extreme appreciation pressures. Concerns over a strong CHF are intensifying amongst Swiss exporters. Unlike 2011, the SNB still has scope today to cut rates to cool CHF demand.
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