Yen strengthening during the last two weeks had been widely anticipated by the performance of our own COT FX Indicator, as well as technical considerations related to momentum (RoC) and volatility (ADX). At this point, we must try to understand what the future evolution of the Japanese currency will be.

A useful indicator can be represented by the Germany-Japan spread on interest rates. The 2 years differential fell for the first time below zero and this shows us that the Japanese syndrome has already erupted in Europe. The most interesting aspect is related to the strong positive correlation between spread and cross EUR / JPY correlation, which leaves no doubt about the future evolution of the Yen. It seems that the last few weeks divergence is not sustainable any more, with German rates even lower than the Japanese ones and Euro becoming so strong against theYen.

Furthermore, we can also add the behavior of the hedge funds on the futures market. Large Speculators have comeback net short on the Yen with a percentage on the open interest that, in the last 5 years though, has always caught the peak of greatest weakness in Yen. Relying on these considerations, we can expected EUR / JPY under 100 unless the Bank of Japan and especially ECB interfere in some way…

German/Japan 2y Spread