Following my previous blog “Are Equity Markets Overbought ?” I am now looking at G10 FX using the same methodology. I have therefore adapted my script to download Daily FX rates from FRED. The Federal Reserve Economic Data is compiled by the Federal reserve bank of St Louis, a goldmine for you quants out there….Anyhow the results are here below.
My conclusion from the above charts is as follows: There are no currency in overbought/oversold territory anymore (G10 FX) . The only culprit was the Japanese Yen which had depreciated against the US Dollar well beyond normal statistical levels. However this has corrected sharply across the last few weeks with the yen appreciating close to 10% against the Greenback since May 21st. In fact the Japanese Yen is now significantly overbought against the US Dollar on both the 1 week and the 1 month time frame with T-Statistics of respectively – 1.99 and – 2.67 for those periods. Bearing in mind that the market may have been a bit too sanguine in its interpretation of how significantly and speedily the Fed will withdraw liquidity from the market it may well be that USDJPY is the odd one to look for prior tomorrow’s release of the FOMC minutes. If we are provided with any possible interpretation for a continued dovish policy via the FOMC statement , I would expect to see global equity markets to make some healthy ground and the current correlation between equity and Yen to resume…. USDJPY currently at 95.20 seems cheap to me…….