BNP Paribas CLEER provides model-based projections for cyclical equilibrium exchange rates based on economic fundamentals.
"Our economists expect the Fed to remain on hold in 2016 and 2017, causing the CLEER projection for the USD to be revised down," BNPP notes.
"EURUSD’s current CLEER stands at 1.03, suggesting the pair is trading too high. While the market has pushed back its Fed rate hike expectations, CLEER highlights that the relative stages of the eurozone and US economic cycles suggest EURUSD should be trading lower. The trough of EURUSD’s projection is 1.02. This is above previous projections due to the outlook that the Fed will be unable to deliver rate hikes over the next 21 months," BNPP projects.
"The GBP appears cheap versus its current macroeconomic fundamentals, likely due to the elevated level of political risk. The current CLEER for GBPUSD is 1.47. CLEER projects GBPUSD ranging between 1.47-1.49 over the year ahead. This has been revised down from a previous range of 1.50- 1.53 on BNPP’s revised outlook for the Fed," BNPP notes.
"USDJPY is trading below its current CLEER™ for the first time since mid-2012. The current CLEER is 113.4. This is projected to rise to 119 by end-2016 and 128.6 by end- 2017. This is due to expectations for further rate cut by the BoJ while the interest rate market will start to price in Fed rate hikes beyond 2017," BNPP adds.
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