And on to the contentious issue of fair value
Just like the age-old questions of ‘what’s the best song ever written’ or the ‘greatest goal ever scored’ there’s of course also the thorny issue of ‘fair value’ in the FX market. Where should the major pairings be trading? Well my tuppence-ha’penny worth is as follows:
- USD/JPY; in a period of USD strength could trade 100/105 but in periods of USD weakness should be closer to 75/80.
- EUR/USD; I’d put the long-term fair value somewhere between 1.20/1.25 with 20% variation either side based on prevailing sentiment.
- AUD/USD; 90 cents, max!
- Cable: Has traded near 1.55/1.60 since I’ve been in the market (1986).
- USD/CHF; tough one as this game has changed, but for me probably above 1.10.
I think we are seeing a period of extreme over-valuation in the JPY crosses which will eventually turn around as the market rationalises. The missing ingredient at the moment is the USD, which is almost trendless, up against the JPY and the GBP, lower against the EUR and the CHF, steady against the other commodity currencies. Once the market gets over this period of over-extension, then we will start moving back towards more neutral levels.