EURJPY Medium-Term Short Trade

30 Des 2019

A trade I am looking at is a big long term move on EURJPY. Firstly, just a note for JPY, the BoJ monetary policy is really at its limits and as I said in the JPY analysis that I do not see the BoJ cutting rates or adding more stimulus now that they have got a very large fiscal stimulus package which they wanted. However, on the other hand the ECB already have negative rates and they are talking about cutting them further and continuing with stimulus. Furthermore, they also have a new President, Lagarde who replaced Draghi. Mario Draghi was a very clever central banker, he knew how to deal with situations, however I do not think Lagarde is in the same league because he has no experience of monetary policy and previously she was head of the IMF, and left them with their biggest debts ever, she was a disaster when she was the finance minister in France, and criminal conviction as well. Looking at her recent comments in speeches, she thinks that the best way to help the Eurozone is printing money and she thinks negative rates are really good. To be fair, it seems like Lagarde wants fiscal stimulus from the government which is a move in the right direction however Draghi wanted that for years but he never got it because the EU governments failed to comply – and I don’t think Lagarde will get it either. The ECB have had a monetary policy in place which they have tried for many years and it has failed, then they stopped it for a little while, now they have brought it back and they are expecting it to work again – it just shows how clueless some central banks are, but I suppose for the ECB there is nothing else they can do because ‘the tool kit hasn’t got any more tools left but stimulus and negative rates’ and this is not going to help. So, the difference here is that the BoJ wanted fiscal help and got it, whereas the ECB have been wanting fiscal stimulus for several years and have not got it and it doesn’t look like we will see it any time in the future. Additionally, economy wise, I think there is a very high chance we could see the Eurozone in a recession by the 1st or 2nd quarter of 2020. Eurozone’s powerhouse, Germany, is very near a recession themselves. In terms of Japan, a lot of strain on Japan’s economy this year has been caused by the US-China trade tensions – which primarily lead to a slowdown in the Chinese economy however this has had a huge effect on Japan. China is Japan’s largest exporter (goods mainly being machinery) and because of China’s lack of growth, Japan’s manufacturing data has taken a hit, but more specifically their machine tool orders has been extremely weak (currently at 2009 lows).

I think that the divergence between the 2 central banks is highly significant. Looking at the charts, as we can see on the EURJPY daily that the EUR has rallied a decent amount since September (~650 pips), however I am thinking that we will see a full retracement of that move in the coming months. We can see the price attempting to get through the 122.0 level, the first candle is a strong exhaustion candle, however on the next candle we have another retest followed by an indecisive candle. Now the price has rallied back up and we are sat just above the 122.0 level, and I made a decent trade of this 120 pip rally last week. There are 2 ways of playing this trade in my view, we have a strong 123.0 level (highlighted in purple) where I will look to short if the price does go to test that level. If the price breaks lower and does not go to test 123.0, I will look to enter around the 120.9 area (highlighted in orange), once the price has cleared the previous consolidation resistance. My mid term target for this trade is probably around the 117.0 level (~550 pips), however on the very long term I would target 110.0 (~1300 pips) which is a key monthly support – and I think this could very much happen if we do see Eurozone fall into a recession next year.