Credit Agricole’s (OTC:) FAST FX model showed that the currency pair looked overvalued, prompting the bank to recommend a sell trade. The model estimates that the short-term fair value of EUR/JPY has fallen from its all-time high of 163.9110 to 162.1633.
The shift was linked to a rise in peripheral European government bond (EGB) yields relative to German bond yields, as well as European equities underperforming their Japanese peers and a decline in the eurozone-Japan terms of trade ratio.
According to Credit Agricole, the current valuation of the EUR/JPY pair exceeds the threshold of more than two standard deviations from its estimated fair value. As a result, the bank initiated a transaction to sell the currency pair. They set a stop loss level of -2.74% and a take profit target of a restated fair value of 162.1633.
According to the FAST FX banking model, the trade will automatically close at 22:00 BST on Friday 17 May. Trading will be terminated at this time if the EUR/JPY pair does not reach the take profit or stop loss levels set by the bank before the specified date.
This move by Credit Agricole reflects a reaction to recent market events that have affected the valuation of the EUR/JPY currency pair. The bank’s analysis shows the pair is currently trading above what its model considers a sustainable level based on short-term fair value estimates.
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