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US Dollar/Japanese Yen Valuation Forecast: Bearish


The bottom line for USDJPY is little changed from last month: "A broad-based unwinding of the carry trade has seen the Japanese Yen become profoundly overvalued against the US Dollar."

While continued pain in the stock market looks set to push the pair lower, it does stand to reason that at some point the sharp deleveraging we have seen will find a floor and the fundamentals will take over to erode the correlation between the Yen and stock markets.

As this occurs, the dire state of the Japanese economy and its likelihood to lag in the recovery behind that of the US (for surely Japanese authorities have not been as aggressive or creative in tackling the problem as their American counterparts) have scope to send USDJPY higher.

What is Purchasing Power Parity?


One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity.

This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD).

We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.