Citi Trade of the Week: Sell EUR/JPY

Our weekly trades will provide short term guidance on where we see 1-2 week opportunities in G10 FX markets. Unless we explicitly extend them, they will close out automatically at COB the second Friday after they are introduced.

Trade idea: Sell EURJPY 138.45, target 135.10, stop loss 141.10

Our view:

At the open, the Greek negotiations still remain unresolved – how we view the risk is asymmetrical; no agreement is outright EUR negative, while a negotiated solution is likely to be short-term, imperfect, and with a fat tail to risk (such as a cash-for-reforms solution). Strong divergences have appeared between the IMF’s and European Commissions view of a sustainable fiscal path for Greece. Any negotiated agreement still faces hurdles before EUR can be given an all-clear and will still have to pass through the Greek parliament, a second source of EUR negative risk. The implicit support that Tspiras received from Syriza hard-liners was that their backing was for any “reasonable” compromise. In short, Greece and Europe need to accomplish in the next two weeks something it has not been able to in the previous 4 months.

On the data front, the positive bump to Europe from Q1 is receding – we would highlight the April trade balance and German ZEW. The improving trade balance helping to support Europe’s surplus continues to face headwinds now that EUR is no-longer falling. The market is forecasting a +19bn for April, down  from +19.7bn in March. The Current situation of the German ZEW (that which is correlated to IFO), has peaked near 2014 highs and started falling. A continuation is expected – highlighting a weakening sentiment and weaker leading indicators for Germany.

In Japan, the BoJ is scheduled to hold its monetary on June 18/19. It’s almost certain that Governor Kuroda will be asked about his comments on the yen last Wednesday at the press conference. We believe a veteran bureaucrat who headed Japan’s FX policy in the MoF spoke intentionally last week. Given his initial aim must have been achieved, he will not try to stimulate the FX market further. But the improving economic data recently announced would be encouraging the central bank and Kuroda is expected to emphasize the bank’s long-term optimism, to push back the market expectation for its additional easing.

We don’t expect an upside surprise with the FOMC this week. If the Greek negotiations cannot make a progress before the European minister meeting on June 19 and market sentiments become more fragile, it is likely to stop the yield increases in the US and Europe and benefit the Japanese currency.

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