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Bearish EUR/JPY on Accelerating Italian Political Drama

Bearish EUR/JPY on Accelerating Italian Political Drama

Tyler Yell, CMT, Currency Strategist


What's on this page

The BIG Idea on Bearish EUR/JPY

EURJPY is back on the radar after hitting the lowest levels since June, and the trend lower may continue for reasons that JPY bulls have come to love.

In short, Japan remains one of the world’s largest creditors, and when risk-sentiment turns sour, Japan is often the first to respond. The drama in Italy and Spain have caused sharp repatriation of JPY as the JPY has strengthened to the highest level since June against the EUR, and further drama may take EURJPY lower toward the lower 120 JPY per EUR zone.

Another way you can look at this relationship is by charting JPYEUR as opposed to EURJPY. This is a natural inverse but helps to visualize how JPY is strengthening as the BTP-Bund spread blows out above 200bps. This week, Allianz said they view a likely move toward 300bps.

Italian Drama Is Showcasing A Strengthening Yen

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Data source: Bloomberg

Options have been clear in that global investors are set to protect against further JPY gains and particularly against the EUR. The correlation of falling EUR/JPY has aligned with a widening BTP-Bund spread which measures perceived risk of sovereign debt between Italy and Germany.

Increasing Premium for EURJPY Puts Favors Lower EURJPY Spot

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Data source: Bloomberg

Traders can also see this relationship via the options market. Risk reversals are a simple to visualize way of understanding where the perception of risk is skewed. The chart above shows the ratio over a 3-month tenor.

A falling risk reversal means that puts, a bet on downside prices, are receiving a premium to calls over a fixed time-frame and tend to pull down the spot price.

Technically Speaking

Point to Establish Short Exposure: Pull-back to 129 JPY to EUR

Spot: 127.5 JPY to EUR

Target: 124 JPY to EUR, prior resistance, Fibonacci level

Invalidation Level: 131.3 May 22 high

If you are looking for other strong trading ideas, you may enjoy our FREE Trading Guides

The BIG Picture on EUR/JPY:

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

IG Client Sentiment Highlight: EURJPY may continue to fall based on contrarian bias

Chart created by Tyler Yell, CMT

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURJPY prices may continue to fall.

More for your trading:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer a excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

Talk markets on twitter @ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.