Top Trade Idea 2019: Short EUR/JPY as European Political Risks Explode amid Dearth of Leadership
The risks to stability in the Eurozone are rising, and with them, the risks to the Euro. Issues are cropping up everywhere, and it’s possible that Europe may see significant leadership turnover just as debt and growth concerns have started to make waves again:
- French President Emmanuel Macron may face a no-confidence vote over the “gilet jaunes” or “yellow vests movement,” opening up the possibility for the anti-EU Marine Le Pen to re-enter the political fray;
- The Italian government has dug its heels in over the European Commission’s desire to dictate its budget, despite not breaching the 3% deficit-to-GDP ratio;
- Angela Merkel is nearing the end of her term as German Chancellor, with no clear successor in sight;
- The Spanish government’s ruling mandate has proven weak, and fresh elections could emerge in early-2019 that produce an anti-EU government;
- Brexit continues to go off the rails (although that’s more a function of the UK than the EU);
- and the European Central Bank needs a new president, as Mario Draghi’s term ends in October 2019.
Following the Brexit vote in June 2016, fears swelled over the rise of populism across the continent. But following defeats by populists in the spring of 2017, political risk for the Euro has seemingly been relegated to the backburner. Now, as the calendar turns to 2019, the grace period for European politics may be over. The preferred avenue to express this negative EUR bias is via EUR/JPY. The Japanese Yen side of the trade is appealing, given the Yen’s role as a safe haven during times of significant economic and political turmoil (which is the risk to the Euro at present time).
Fundamentally, a tweak to Japanese fiscal policy may also serve to support the Yen moving forward: starting in 2019, the Japanese Global Pension Investment Fund (GPIF) will start hedging its investments denominated in foreign currency. Currently, the GPIF’s unhedged investments mean that the GPIF is essentially short JPY as long as it hold assets denominated in foreign currencies. Moving forward, hedging these investments means the GPIF will deploy long JPY positions. This is a small, but meaningful change for a key player in Japanese financial markets.
EUR/JPY Price Chart: Weekly Timeframe (April 2008 to December 2018) (Chart 1)
Technically speaking, EUR/JPY has been funneling into the confluence region of its symmetrical triangle support dating back to the 2008 and 2014 highs and the 2012 and 2016 lows. A look at the weekly timeframe shows that the relationship between price and time dictates that the symmetrical triangle should find resolution by the end of 2019 (chart 1, above).
Given our fundamental bias for lower EUR/JPY prices, our expectation is for price to move towards support over the course of the year. In the early part of 2019, in line with our view for EUR/JPY weakness, traders should keep an eye on the rising trendline from the 2016 and 2017 lows (chart 2, below). If EUR/JPY trades sideways from its closing price on December 14, it will run into the rising trendline support from the 2016 and 2017 lows before the end of Q1’19.
EUR/JPY Price Chart: Daily Timeframe (December 2016 to December 2018) (Chart 2)
As we enter 2019, the technical bias is pointed lower as well for EUR/JPY. The short-term moving average envelope (daily 8-, 13, and 21-EMAs) is fully bearish, as is the medium-term envelope (daily 21- and 50-EMAs). In early-2019, traders will want to watch for a break of the 23.6% Fibonacci retracement of the 2018 range (124.62 to 137.51) at 127.66 where priced failed to close below in either November or December 2018; a break below here would signal that weakness is setting in.
Invalidation of the bearish outlook in Q1’19 would occur above the daily 50-EMA, which price has not closed above since October 5, 2018 (and it only traded above the daily 50-EMA for 11 days between April 25 and December 14). The bearish EUR/JPY bias should be revisited at the end of Q1’19.
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