EUR/JPY extends the upside into supply territories

EUR/JPY is firmly on the bid on Monday, as equities rebound and the euro extends its carry trade unwind. At the time of writing, EUR/JPY is trading at 120.58, +1.27% having travelled between a low of 118.60 and a high of 120.71.

EUR/JPY is benefitting from a number of market developments, with the yen on the backfoot, giving background to some recent bullish trajectory in global equities, and carry to vol ratios in free-fall with the MSCI printing a fresh low of 976.20. 

The coronavirus has sparked up a portfolio shift with panic selling pushing the VIX to unchartered territories and Wall Street to plummet into official correction territory – the Dow had its biggest one day decline since October 2008. EUR was at a nine-month low before rebound which likely explains the massive squeezein short EUR positions. 

Central banks in focus

 Much now will depend on the sentiment for central banks, but whether the recent correction in markets is sustainable is dubious and the yen is typically a beneficiary of safe-haven flows. A pullback in the euro is not out of the question which would equate to a lower cross. The ECB will be in no mood for pre-emptive rate cuts, but given the moves we are seeing in European shares, the central bank may have little choice.

The 12th March meeting will be a critical one, as will the first look at February CPI and retail sales are the key Eurozone releases in the week ahead. However, the data will likely come second place to sentiment surrounding the coronavirus and forecasts for the economic hit to the eurozone economy over the next number of weeks, likely capping the euro's upside in the near term with investors already shaken out of EM-FX, such as RUB, ZAR and MXN. 

EUR/JPY levels

• EUR/JPY Price Analysis: Choppy moves in this pair