Being short EUR/JPY seems to working quite nicely at present. We said yesterday that traders may be looking to go short EUR/JPY on a close below 95.60, and the momentum behind the pair is clear for all to see.
EUR/USD also continues to head to our potential medium term target of 1.1877 (2010 low), although we realise just how one-sided traders have become. Once again it is hard to find anything remotely bullish to say about Europe, with a certain Spanish publication suggesting some officials haven’t ruled out leaving the euro or considering applying for a bailout, or even a restructure.
Spanish two-year yields pushed up eleven basis points to 6.64%, and it is becoming increasing likely that the bond market is pushing up yields in a bid to bring out ECB action. With Spanish borrowing costs too high, clearly something has to give, and what is more worrying is that Italy now seems to be the target as contagion spreads through the periphery. While funds from the ESM/EFSF may just about cover a Spanish bailout, it certainly won’t stretch to Italy as well. Greece also seems to missing its deficit targets, which shouldn’t surprise too many people, but more worrying is the level of officials (namely from Germany) who are calling for Greece to leave the EMU. German and French PMIs also went deeper into contractionary territory yesterday.
With EUR/JPY falling to a low of 94.12 and then subsequently 94.14 later in trade, for momentum to continue it would be nice to see a lower low in upcoming trade. We will keep an eye on the German IFO business climate, which is expected to decline to 104.5. It will once again be interesting to see how the bond market reacts to news that Moody’s has changed the outlook on the EFSF (who need to issue bonds to fund itself) to negative. There was also a limited reaction to an article written by Jon Hilsenrath in the Wall Street Journal in which he said that the Fed may buy more assets (i.e. QE3) if growth doesn’t pick up, highlighting the September meeting as the likely point where it will be largely discussed. This may get more focus in US trade and could affect EUR/JPY.