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.

  1. Just as you typed this, the USD/CHF dips below 9600. Long way to get your target 1.1 🙂 I will have a sleepless weekend 🙁

    1. I meant 0.9060
      But agree with you on fair value. I used to live in Switzerland when the franc was at the fair levels. EURCHF around 1.6 and CHFUSD well below parity. When I moved to Australia the franc started to rocket 🙂

  2. Hi sean.this seems an apt time for me to ask you this. where do you see currency markets in the future???
    i think the euro experiment has taught everyone that single unified currencies are not feasible.
    Do you see the currency markets expanding enormously with hopefully the yuan becoming much freely traded( a boon i would say) and the euro zone breaking up?..and a break down of RoRo(risk on risk off0 correlations permanently!!?
    i would love to know ur opinion because this is my passion and im sure of many others and theres a good chance that things could go sour you consider the odds of the currency market being frozen up by government manipulation (atleast for a few years) significant??
    thank you very much sean.

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