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BNP Paribas STEER™ Summary - 08 October 2013

Core Content

BNP Paribas STEER™ is a tool used to estimate short-term fair values of exchange rates based on various financial market indicators. The report outlines the current status of several currency pairs, highlighting overvaluation, undervaluation, and potential movements.

Main Views and Key Information

EUR/NOK

• EURNOK remains overvalued despite a sell-off in Norwegian government bonds.
• The STEER for EURNOK has increased from 7.8550 to 7.9940 over the past week.
• Even after considering the rise in Norwegian 10y Treasury yields, EURNOK is overbought by 1.07 z-scores and is vulnerable to a further decline.

GBP/USD

• GBPUSD remains overvalued by 1.22 z-scores.
• The pair has moved closer to its fair value, entering the top of its $+/-1.5$ z-score corridor.
• EURGBP has moved back in line with its STEER of 0.8470, indicating a potential for GBPUSD to decline further.

EUR/USD

• EURUSD is overvalued by around 1.00 z-score and is expected to decline.
• The STEER for EURUSD is at 1.3440, and the pair is currently at 1.3566.

USD/JPY and EUR/CHF

• USDJPY and EURCHF are undervalued, trading below their $+/-1.5$ z-score corridors.
• USDJPY is currently 1.8 z-scores below its STEER of 101.95.
• EURCHF is 1.62 z-scores below its STEER of 1.2405.
• STEER indicates scope for both USDJPY and EURCHF to rise.

Other Currency Pairs

Key Observations

• Overvaluation indicates the exchange rate is likely to fall.
• Undervaluation suggests the currency is likely to rise.
• A misvaluation greater than 1.5 z-scores is considered a significant predictor of exchange-rate movements.
• USDTWD is the most undervalued EM currency, but the model does not pass the co-integration test, indicating lower forecasting power.
• EURSEK, USDCAD, and NZDUSD are trading broadly in line with their fair values.

Strategy Insights

• The STEER model uses interest rate differentials, relative yield curve steepness, equity market performance, and commodity prices to estimate fair values.
• A simple trading rule of buying "cheap" crosses and selling "expensive" crosses has historically been a successful strategy.
• GBPUSD is moving back towards its STEER, while EURUSD is expected to decline further.

Disclaimer

• This document is non-independent research and marketing communication.
• It is not intended as independent investment research and may be subject to conflicts of interest.
• The information and opinions are based on public sources and are not guaranteed to be accurate or up to date.
• No liability is accepted for any loss arising from the use of this report.
• The report is for professional clients only and may not be distributed to retail clients.

Contacts

• James Hellawell - Quantitative Strategist, London
• Michael Sneyd - FX Strategist & Lead Quant Strategist, London
• Steven Saywell - Global Head of FX Strategy, London
• Phyllis Papadavid - Senior Global FX Strategist, London
• Diana Seifert - Foreign Exchange, London
• Mirza Baig, Rohit K Garg, Jasmine Poh, Yii Hui Wong - FX & IR Asia Strategy, Singapore
• Thiago Alday, James Z Hao - FX & IR Latam Strategy, Sao Paulo & New York
• Bartosz Pawlowski - Global Head of EM Strategy, London
• Dina Ahmad, Stanislav Petrov - FX & IR CEEMEA Strategy, London

Distribution and Jurisdiction

• This report is solely for professional clients in certain jurisdictions and is not intended for retail clients.
• BNP Paribas is incorporated in France and operates under various regulatory bodies in the UK, France, Germany, Japan, Hong Kong, Australia, and Singapore.

Final Notes

• STEER™ is a trade mark of BNP Paribas.
• The report may be subject to change without notice and is not to be relied upon as authoritative.