Credit Agricole's (OTC:) FAST FX model indicated that the currency pair appears overvalued, prompting the bank to recommend a sell trade. The model estimates that the short-term fair value of the EUR/JPY has fallen from a record high of 163.9110 to 162.1633.
This shift is due to the rise in European government bond (EGB) yields relative to German bond yields, coupled with the weak performance of European stocks against their Japanese counterparts and the decline in the terms of trade ratio between the Eurozone and Japan.
According to Credit Agricole, the current valuation of EUR/JPY is more than two standard deviations above its estimated fair value. As a result, the bank initiates a sell trade for the currency pair. They set their stop loss level at -2.74% and take profit target at the recalculated fair value of 162.1633.
The bank's FAST FX model is scheduled to automatically close trading at 22:00 GMT on Friday 17 May. The trade will be terminated at this time unless the EUR/JPY pair reaches the take profit or stop loss levels set by the bank. Bank ahead of schedule.
This move by Credit Agricole reflects a response to recent market developments that have affected the valuation of the EUR/JPY currency pair. The bank's analysis suggests that the pair is currently trading above what its model considers a sustainable level, based on short-term fair value estimates.
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