EUR/JPY: Closely correlated to stocks, upside correction is over


  • EUR/JPY is currently trading at 122.26, trading between 122.17 and 122.56, -0.17%.
  • Trade wars weighing on stocks.

EUR/JPY is a good gauge for the market's risk appetite, commonly correlated to the performance of global stocks. Markets are preparing for a much more prolonged global trade war between the U.S. and its competitors, which is weighing on risk sentiment - While we have seen attempts of a recovery in stocks, bulls are struggling to make traction and benchmarks have moved into a sideways consolidation of the early June partial recovery. EUR/JPY has turned south as a result. 

Eyes back on trade wars

For a moment there, eyes were off the ball as we moved back in towards the Fed which is around the corner. The nonfarm payrolls disappointment was a wake-up call, and with CPI and retail sales this week, investors put down the trade war batton and, instead, traded the central bank theme and economic data again.

However, this week, trade has come back to the fore and on a number of fronts - Firstly, U.S. and China remain at loggerheads, and while we expect Xi and Trump who are looking to schedule to meet later this month at the G20, to eventually iron something out, Trump has been quite casual about reminding markets that tariffs will be implemented and that it is no a bluff. Trump has warned that If Xi doesn't commit to a meeting soon, or if Chinese negotiators do not agree to the Trump administration's requirements within a trade deal, further tariffs will be implemented and immediately.  

Trump also spoke of the same 'punishment' for Mexico if the nation doesn't follow through with recently negotiated agreements on illegal immigration controls. Then, additionally, Trump has voiced his concerns over Russian and European relations over the controversial Nord Stream 2 pipeline - The U.S. and many European nations fear the pipeline would help Russia bypass infrastructure in Ukraine, allowing Moscow to use energy supplies as a weapon which is something Trump has called out as unacceptable. 

“Well, we’re looking at it. People have a right to do what they want to do. I think it’s something that I’ve been looking at and I’ve been thinking about and I’m the one that brought up the pipeline problem,”

Trump said during an appearance with Polish President Andrzej Duda.

Yesterday, Trump said he was considering sanctions over Russia's Nord Stream 2 natural gas pipeline project — which the United States has told European companies to avoid — and warned Germany against being dependent on Russia for the fuel. "We're protecting Germany from Russia and Russia is getting billions and billions of dollars from Germany."

FOMC coming up

Meanwhile, the FOMC is indeed around the corner. The theme here is that central banks are moving towards a more accommodative stance considering the headwinds associated to prolong trade wars. This is seen as something that could off-sett that potential for a global downturn and is regarded as supportive to risk appetite and stock markets, potentially weighing on the yen overall.

While the majority of the market doesn't expect a rate cut from the Fed as soon as next week, it is pricing in a dovish rhetoric and dovish adjustment to the dot plot, whereby the FOMC will use this meeting around to set the basis for an easing policy for the foreseeable future - perhaps as soon as July.

"We expect the June FOMC meeting to tee up for a cut in July, after the G20 meeting. We think the FOMC will remain data-dependent with respect to another insurance cut in 2019. Another cut in December is our base case at this stage, as we believe that growth and inflation are unlikely to surprise meaningfully on the upside and trade tensions are unlikely to abate,"

analysts at Standard Chartered argued, expecting a rate cut in July:

  • We lower our forecast for the 2019 fed funds target rate to 2.00% from 2.50% on trade concerns
  • We now expect a 25bps cut in July, and in December, barring positive data surprises.
  • We lower our 2019 core PCE forecast to 1.70% from 2.0%; we maintain our 2019 GDP forecast, for now.

EUR/JPY levels

Analysts at Commerzbank explained that EUR/JPY is starting to keel over at the 38.2% retracement at 123.10 and we suspect that the correction is over:

"The Elliott wave counts are also negative, suggesting that this correction will fail just ahead of the 123.88 55 day ma. Short term we continue to look for failure and target the 119.91 78.6% Fibonacci retracement. Resistance offered by the 123.75, May 21 high and the 55 day moving average at 123.88 – maintains an overall negative bias and protects 125.52 78.6% retracement and the 200 day ma at 126.48."


 

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