EURJPY Analysis

I wanted to take a quick look at the EURJPY which is caught in an interesting crossfire at the moment.

Despite the sprawling saga surrounding the situation in Greece which has been a key theme in markets this year, EURJPY has actually enjoyed a rather emphatic move to the upside over the last two months, having bottomed in in April with 126 lows, the pair is now sitting over 10% higher having challenged the 140 handle this month.

It seems that markets have been focused more on the stronger EuroZone data we’ve seen, than the issue of Greece defaulting/exiting the EuroZone. Data wise, the stand out points for the EZ have been the return to inflation for the first time in six months, with May CPI 0.3% with some mulling the possibility that if data should continue to improve, the ECB may not carry through it’s QE program to the stated target date of September 2016.

This has not been a totally Euro-centric story however, as Yen weakness has been another key theme over recent months. Low domestic interest rates and a weakening yen have encouraged Japanese investors to invest abroad with a surging Nikkei creating a positive risk atmosphere with Japanese importers benefiting from the decline in oil prices and exporters benefiting from the weaker Yen.

So what now?

Well there are 3 factors that I see as key drivers of EURJPY over the medium term:

  1. The Greek situation
  2. The BoJ
  3. Fed Rate Hike
  • If we see a deal struck between Greece and the ECB then we are likely to continue higher not solely from the obvious support it will lend to EUR but also from the avoided “risk-off” environment that will see Japanese investors remain in foreign investments. Whilst this will drive EURJPY higher initially, the ECB’s QE program is likely to return to the forefront and see EUR weaken again. As markets don’t seem fully convinced by the possibility of Greece exiting the EZ I don’t expect this move to be be a euphoric surge higher, possibly more of a spike or a short lived rally exhaustive rally which could be capped as early as a retest of 140 or possibly higher at the 1.45 resistance level.  If indeed a deal is not struck and we do see Greek exit the EuroZone then the subsequent “risk-off” mode would see Japanese investors return to JGBs and drive EURJPY lower.
  • The BoJ have as yet been very hands-off this year adopting a “wait and see” approach whilst remaining optimistic about Japan’s likelihood of achieving the BoJ’s inflation target. Comments from BoJ’s kuroda recently sparked a rally in JPY when he said that further Yen weakness was “unlikely” , fuelling specualtion that the BoJ were set to reduce stimulus. Kuroda has since clarified those comments as being totally misinterpreted and the BoJ have maintained their QE program. Provided there is no deterioration in the Japanese economy BoJ should remain neutral for the time being, as they are clearly reluctant to introduce further easing which would drive Yen lower and spike import prices.
  • Lastly is the issue of a Fed rate-hike. The recent FOMC meeting saw the Fed adopting a more dovish tone, downplaying the importance of the first rate-hike and stating that the pace of subsequent rate increases will be lower. Consequently markets began pricing out a summer hike and are now looking at September/December lift-off dates. For now this leaves Japanese investors safe, however as we approach the anticipated lift off months and if data is supportive heading into these we are likely to see Japanese investors adopt a “risk-averse” mode and return to the safe haven JPY which coupled with the policy differential between the EuroZone & America would see EURJPY lower.

Technical Perspective

EJ1

We can see on the Weekly chart that price was initially moving along a bullish trend line (green line) before it broke down, retested the trendline and sold off. We have since retraced sharply higher back above the bullish trend line and indeed as price retested the trend line from above, we bounced . We are currently stalled at a key resistance level and failure to break higher here suggests the bearish channel (pink lines) is in play.

The key thing now is going to be a break of the upper pink bearish trend line or a break of the green bullish trend line.  

As you can see the Psych indicator (used on a 12 period here to give a 3 month reading) has been nailing these swings but currently is still bullish so I will be monitoring this indicator for a signal to then drop down onto the daily chart for an entry point.    The bearish option is my preferred play as it makes more sense to me fundamentally but I trade what I see and if we break higher and Psych confirms the move I will trade it.

The summer trading months are notoriously slow and with volumes reduced currently this is a trade that may take a little time to develop but with Greek headlines flooding the wires it’s important to stay vigilant as we may see it develop sooner than anticipated.  So too EUR news and USD news can affect this outlook. I will update you as we progress.

 

Posted in Forex Analysis, tagged with on