- EUR/JPY has recovered from the lowest levels since late August as benchmark indexes on Wall Street battle their way back from out of oversold conditions.
- USD/JPY takes back the 112 handle and trades within familiar ranges.
- Yen shorts drop back dropped back for a second consecutive week.
EUR/JPY has been strong at the start of the week despite German Chancellor Merkel’s governing coalition party has losing significant support in the wealthy state of Hesse, home to the financial centre of Frankfurt. Both the CDU party and SPD were -10% on the previous election in the Hesse state. “Germans are calling this a ‘schicksalswahl’, or vote of destiny. It may yet seal the fate of this country’s government – and perhaps even its leader,” The BBC reported – (The CDU polled just 28% of the vote. That was down from 38.3% in 2013. The SPD won 20% down from 30.7% in 2013. The Greens came in a close third at 19.5%).
However, the cross tends to track the performance of the equities and Wall Sreet has taken its cues from Europe’s recovery on easing concerns over the impact of the Italian budget crisis amid falling Italian T-bond yields and a narrowing spread with German government bond yields. The DJIA is +0.93%, NASDAQ 0.79% and S&P 500 1.23% in the green at the time of writing.
As far as positioning, the IMM Net Speculators’ Positioning as at October 23, 2018 has the net JPY short positions falling back for a second consecutive week having reached their highest level since January earlier in the month. “The movements in the JPY tend to reflect broad levels of risk aversion, so the move is consistent with a poorer tone in risky assets,” analysts at Rabobank noted, adding that short EUR positions increased for a fourth week and are at their greatest level since March 2017. “Sour politics in both Italy and Germany have likely been feeding the negative mood for the euro with a slightly less hawkish takeaway from the October ECB meeting also impacting the spot market last week.”
While the pair is performing on the bid, the overall picture remains bearish until bulls can get back to 130.20 22nd Oct high, otherwise, the 78.6% retracement at 126.66 is back into the picture on a continuation of the broader bearish channel. “126.66/64 is the last defence for the 124.91/62 May and August low. This guards the 124.08 December 2016 high and 122.40 June 2017 low,” analysts at Commerzbank wrote. However, on a continuation towards channel resistance, bulls can target 133.13/48, the highs since April. “Above 133.48 lies the 134.27 1979-2018 downtrend line. Still further up sit the 137.51 2018 high and the 137.87 2008-2018 resistance line.”