BUY EURJPY 118.50 STOP 117.50 TARGET 1.2150
(Risk 0.75%, trade valid unless we trade below the stop level before the trade is triggered)
JPY: Bank of Japan Governor Kuroda indicated last week that the Bank is now closer to deciding on further easing than they were earlier in the year. The BOJ has also cut back purchases of 5-10year JGBs, which, combined with speculation that rates could go lower than -0.1%, has steepened the yield curve. All of this makes a case for the yen, one of just a handful of currencies to have done better than the dollar in 2019, to weaken. It’s less undervalued in real terms than it was, and it has been tracking short-term rate differentials and the yield curve very well this year. Furthermore, speculators are bullish and long of the yen, whereas they are bearish and short of both the euro and the pound. Indeed. So maybe the ECB’s provocation has awoken the BOJ.
EUR: If you want to see this as a bilateral, ever-so-polite currency war, then Mr Draghi responded in 2015 by driving the euro even lower and regaining an advantage. But after Mr Draghi’s speech in Sintra in 2017 promising asset purchases would be tapered, the two currencies swapped positions again thanks the BOJ maintaining their easy policies. But this summer, with the yen strengthening in part because it is even more affected by yuan weakness than the euro is, while the euro was dragged down by a fresh round of ECB easing, the tables are turned again and as of now, the euro is once again even cheaper than the yen. President Trump is irked by the dollar’s strength, but Mr Kuroda may be annoyed that the ECB is succeeding in getting the upper hand. If the BOJ can surprise the market by how much it is easing, drive short-term rates lower and steepen the yield curve, positioning and probably sentiment are ripe to shake some lazy yen longs out of their sleep. The BOJ meeting isn’t until Halloween but there’s already enough chatter for some EURJPY short covering.
From a technical and trading perspective the EURJPY appears to be carving out a higher low following the initial corrective push higher which is potentially completes the ABC legs of the broader corrective ABCD pattern highlighted in the chart, note we may also be carving out an inverse head and shoulders pattern. I am going to buy a range break at 118.50 risking 100pips to potentially make 300pips
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