We are looking for a major trend reversal in EUR/JPY – EUR/USD has hit a 20-year low and we have a big downtrend and now expect the EUR to fall in the JPY. Our views on the Fundamentals sentiment and technicals are below.
Interest Rates Outlook
The chart below shows that of major nations Japan and Euro zone have the lowest rates but the euro has risen on the view that the ECB will hike and the Bank of Japan will stay with negative rates. Our view in recent articles is the ECB will NOT raise interest rates as much as the market expects which we can see on the chart below.
ECB Anti Fragmentation Tool to Fail
The ECB want to raise rates but the spike in bond yields in the poorer nations of the zone in response to this means the ECB has to step in to keep bond yields down so how will they do this?
The ECB says it will reinvest redemptions from its emergency bond-purchasing program (Known as PEPP) in a flexible way and it will ask its team to “accelerate the completion of the design of a new anti-fragmentation instrument.”
“Flexible PEPP reinvestments might buy policymakers a little time, but the new ‘anti-fragmentation instrument’ that the Bank is working on will need to go a whole lot further,” he said. “And there is no guarantee that they reach a consensus on such a tool at the next policy meeting in July, so we could see spreads widen further before a new tool is in place.” (Jack Allen-Reynolds Capital Economics.)
If interest rates do rise in the zone this is factored in what isn’t is if they back off raising rates to stop fragmentation or we get a huge spike in bond yields and a liquidity crisis
Economy Comparison Euro Zone V Japan
Which economy is doing better? Euro zone as we have noted in previous articles is guaranteed a recession even if there is no full cut-off of Russia Gas which we think will happen. Over in Japan…
“The world’s third-largest economy contracted at an annual rate of 0.5%, according to Cabinet Office data. That was smaller than the 1.0% contraction in the preliminary estimate for Japan’s real gross domestic product, or GDP, released in May.” (ABC News)
Japan’s economy contracted 0.1% in January-March from the previous quarter, better than the 0.2% quarter-on-quarter contraction in the preliminary data. Consumer spending and other private demand which was also stronger than forecast.
The Japanese economy is hardly doing great but its in a lot better shape than the EU economy.
The market is generally bullish on the euro zone and the euro but bearish on the JPY due to the interest rate outlook but keep in mind, that a weaker Yen from here won’t help Japan and inflation is nudging up which could see Japan reverse its ultra dovish stance. The good news is discounted for the EUR and the bad news is discounted for the Yen and we expect a major trend reversal in EUR/JPY.
Major support and resistance levels are noted on the chart below.