After breaking above 100 yesterday, we have been hearing
traders and analysts alike state that USDJPY is significantly overvalued at
present levels - Thus, we decided to put our proprietary model to the test.
Backdrop:
These models were built in an effort determine where many of
the FX pairs should be trading, thus we continuously monitor currencies which
we have deemed to have a stronger degree of explanatory power using our
regression analysis (R2), with variables which we see as statistically significant.
Our proprietary model, which takes into account USDJPY's
1-month at-the-money option volatility, Nikkei 225 Index and 2-year interest
rate differential between the United States & Japan - produces an R2 of
0.9834 since the beginning of May 2012 and implies a "fair value" of
102.65. Accordingly, based on current levels this suggests USDJPY is actually
undervalued, rather than overvalued, by approximately 1.2 standard deviations.
Technically speaking, USDJPY is trading within the key
101.25/70 resistance zone, which sees the convergence of the 1999 & 2005
lows and the 2009 high, highlighted yesterday. A break above may lead to a test
of the 38.2% retracement (of the long-term 1998-2011 decline) located just
above 103.00.
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