EURJPY: Downside grows as safe havens flow – TDS

Safe haven trades have returned to the fore with geopolitical tensions escalating between the US and North Korea and has put the CHF and JPY back in focus, explains Mazen Issa, Senior FX Strategist at TDS.

Key Quotes

“Within this, we think EURJPY may become particularly sensitive to a broader and more pronounced deterioration in investor sentiment.’

“We have previously noted that EURJPY should benefit and be at the forefront of a strategic uptick in bond yields. This view has been driven primarily by bund yields on expectations that the ECB will eventually announce further tapering this year. At this juncture, we believe this will occur in October. Absent a more severe geopolitical fallout, the strategic risks lilt higher for the cross.”   

“However, tension on the Korean peninsula continues to ratchet higher and safe haven interest has resumed. In fixed income markets, German bund yields have already retreated from the recent highs around 60bps to trade back below a key technical threshold at 50bps. In currencies, EURCHF has slid by more than 2% off its highest levels since the SNB removed the floor as market confidence has waned notably.”   

“In contrast, EURJPY has thus far shown greater resilience to recent developments. Looking forward, however, we expect this to change. With EUR looking overbought to us against a wide variety of G10 counterparts, we think the common currency has become acutely vulnerable to a position squeeze.”  

“Against a challenging geopolitical backdrop, EURJPY may be among the more vulnerable crosses. In typical risk off events, the cross exhibits a high correlation to a shift in the yield backdrop, both UST and bunds, as well as equities. The current environment may intensify these relationships. Indeed, the cross has already lagged the move in bund yields already. Additionally, the proximity of Japan to the source of current tensions heightens the sensitivity that local investors may have to repatriate some of its external assets abroad should risk sentiment deteriorate further.” 

“From a technical point of view, a move below 128.00/40 should open the 125.80/126.10 major pivot, an area we have previously identified, as a compelling long opportunity absent further geopolitical escalation. We are watching 129.70/130.00 as a potential accelerant to the topside.”