Bearish EUR/JPY on Accelerating Italian Political Drama
The BIG Idea on Bearish EUR/JPY
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
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
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.
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:
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---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.
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