We are bearish on EURUSD and that’s been a great downtrend and now we expect EUR/JPY to have a major trend reversal to the downside. Our logic behind the trade idea and the key levels of support and resistance to look out for are below.
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Euro zone economy faces recession, the ECB have negative rates and while they might get rates out of negative territory they won’t get them up to 1.5% which the market expects as we noted in our last article on EUR/USD. Japan’s economy is in better shape than euro zones and while it has negative rates this could change…
Will the Bank of Japan Signal a Change in Monetary Policy Soon?
GS FX notes that: “Yen depreciation and higher global commodity prices have lifted inflation in Japan. As our rates strategy colleagues note, this has resulted in expectations for a change in monetary policy and significant dislocations in Yen rates markets. They continue…
Over the past week Market News International reported that rising global rates and Yen weakness may be moving the BoJ towards a policy change, which could come in the form of a language tweak at the July meeting (e.g., dropping the reference to COVID outbreaks) which could then “allow a modification of easy policy after the summer” (e.g., at the September meeting)…
We think investors should consider owning USD/JPY downside structures in options now, and look to go short USD/JPY in spot on clear weakness in the US labour market and/or signs of an imminent change in the BoJ’s policy stance” (GOLDMAN SACHS) Tankan report and inflation data are due on Friday 01/06.
Sentiment
Investors at bullish on the euro and hold a sizeable long position and this position if it is taken out on stop, will trigger a major fall in EUR/JPY.
Markets are always discounting the present and looking to the future and the question to ask at this point in time is:
What more good news is coming for the euro or bad news for the Yen? None that we can see and taking short trades longer-term in EUR/JPY offers an excellent risk to reward long-term trend following trade in our view.
Yen As a Safe Haven
“Any surge in rates in Japan would reverberate quickly across financial markets. Yields nearly everywhere would dart higher still, analysts say, pushing up borrowing costs for companies, consumers and governments, and heaping stress on a global economy that’s already begun to slow under the weight of soaring energy prices and snarled supply chains.” (BLOOMBERG)
In light of the above, we should also keep in mind Japan runs a massive current account surplus and is a safe haven in times of market turmoil and it would regain its safe-haven status on a move up in rates.
Technical Analysis
on the chart below we have come off the big 144.00 level and have turned below the 20-day moving average. Nearby resistance is expected to hold rallies and we think that the euro could fall down to 136.00, with maybe a run on down to 134.00.
