EUR/JPY slides on lower bund yields

• The JPY is a major beneficiary of USD weakness.

The EUR/JPY is now trading around 131.08 in New York session, dropping by 0.40% on a slide in German bund yields and mixed EZ economic data on Friday. The benchmark 10Y German bund yield is now hovering around 0.659%, drpping by over 6% and well off the recent high of 0.808%. It is not only the German bond, but the 10Y US bond yield is also trading lower at around 2.884%, down by 1.12% and well off the recent high of 2.957%.

The slump in the US, as well as German and EU bund yields, may be triggered by some comments by US policymakers, downplaying the US inflation pressure despite upbeat wage growth. On Thursday, US Treasury Secretary Mnuchin said that the Trump administration’s policies will raise US wages without causing broader inflation.

Overall, EU economic data came out as expected on Friday. EZ core CPI for January came at -1.7% vs 0.5% prior (M/M); On Y/Y basis it came as 1% vs estimate of 1%; prior: 0.9%. Although EZ core CPI ticked up in January despite a stronger EUR, negative for imported inflation, it is still way below the ECB’s elusive target of 2%.

German GDP for Q4 came subdued at 0.6% vs estimate 0.6%; prior: 0.8% (Q/Q). On Y/Y basis it remained unchanged at 2.3% vs an estimate/prior: 2.3%. The GDP fine prints show that private consumption was tepid, while government capex gave some support.

Early in the Asian session, as a part of Japanese daily jawboning to keep Yen lower, Japan’s finance minister Aso said it’s important that the BOJ maintains the current policy framework (QQE) and Japan may raise the nationwide sales tax (VAT) in October 2019 as scheduled. Howevver, the Yen was largely unfazed.

Japanese Core CPI for January came at an upbeat level of 0.9% vs an estimate 0.8%; prior: 0.9%. Although core CPI ticked up to 0.9% in January despite a strong Yen, negative for imported inflation, still it’s far away from BOJ’s elusive goal of 2% and thus has practically no positive impact on the Yen despite the “robust” CPI may be an indication that Japan is gradually finding itself out of the decade-old deflation.

In brief, the strength in JPY is now a broad reflection of USD weakness and the market confidence that the BOJ will gradually normalize its super-accommodative monetary policy by “back door tapering” (change in yield curve control-YCC mechanism) in the coming days, everything being equal.

Technically, EURJPY has now strong support at 131.10-130.00 area and resistance at 132.50-132.80 zone.