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EUR/JPY Trade Potential a Compliment to EUR/USD

EUR/JPY Trade Potential a Compliment to EUR/USD

2017-10-28 02:57:00
John Kicklighter, Chief Strategist
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Talking Points:

  • There are similarities and differences between EUR/USD and EUR/JPY but both are ultimately appealing as trade opportunities
  • Similarities between the two include similar technical patterns, over-extended Euro exposure and imbalanced fundamental values
  • Key differences include the stage of the reversal effort and the primary fundamental theme that could charge the next leg

Futures speculators have pushed their Euro and Dollar positioning to extreme levels. See how retail FX traders are positioning for EUR/USD and EUR/JPY with short-term preference on the DailyFX Sentiment page.

I laid out the merits of the EUR/USD's trade potential in Friday's Quick Takes video; but for this weekend video, I would like to look at its compliment: EUR/JPY. There are certain similarities between the two but there are also key differences which can present different potential between the two - especially under the influence of certain fundamental catalysts. For many, the technical characteristics are the easiest to compare and contrast. Both pairs have soared through 2017 which is a function of the Euro outperforming all of its major counterparts over that broader period. Not only is the dominant trend a bullish one between both, but they each have shown more recent consolidation that looks staging for possible reversal. For the benchmark Euro cross, the break was made this past week in a neckline break on a months-long head-and-shoulders pattern when 1.1675 fell. The EUR/JPY on the other hand is at the cusp of its turn, but has yet to clear its support at 132. That can give a different opportunity to align technical progress to fundamental motivation to offer more confirmation of conviction - should it come of course.

From a market conditions perspective, both are heavily one-sided. That is a function of the Euro's impressive (if not always logical) drive forward. To get a sense of the commitment to this drive, we can look at the CFTC's Commitment of Traders (COT) report. That series shows of last week that large speculative futures traders maintained an extreme net long Euro view despite the loss of lift over the past few months. The actual break from EUR/USD will not register until at least next week as the report only runs through Tuesday of the week it is released and the neckline fell on Thursday with the ECB rate decision. From the secondary currency in each cross, the speculative extremes are very different. Dollar positioning was extreme net short and just recently started to rebalance. In contrast the Japanese Yen exposure is not as extreme, though it is near multi-year boundaries.

Perhaps the most important ingredient in this recipe for which - or even whether either - offers stronger appeal is the fundamental comparison. The Euro has championed its move on the basis that the markets have attributed greater value to more distant rate forecasts than we have seen in recent history. Bolstering the Euro because of what may happen in ECB policy out in 2018 offered speculative interests a lot of leeway to charge the currency. Yet, after the central bank announces its next phase on policy this past week by halving monthly asset purchases but maintaining them at least through September of next year, there is a palpable sense of disappointment in the pacing. That can prove a common driver for both pairs. From there, there is a clear split. For the Dollar's part, the Fed offers clear monetary policy contrast that can see further leverage to support the Greenback recovering lost ground to its main counterpart. The BoJ is now clearly on the more dovish end of the action scale to the ECB even if there is premium that needs to be worked down in the interim. It is EUR/JPY's benefit that the critical and instantly overriding theme would be risk trends. If risk aversion kicked in, all Yen crosses would drop as loosely held carry is unwound. EUR/USD has had some risk connections in the past, but those have been confused with a shifting correlation to the likes of the S&P 500 over the past few years. I discuss the appeal of EUR/JPY with reference to my previous rundown of EUR/USD in this weekend Quick Takes video.

EUR/JPY Trade Potential a Compliment to EUR/USDEUR/JPY Trade Potential a Compliment to EUR/USDEUR/JPY Trade Potential a Compliment to EUR/USD

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