EUR/JPY set to slip further

The EUR looks set to plumb lower over coming weeks but how quickly will it fall given that market positioning is already at record low levels? The absence of official investors such as central banks who are normally strong buyers of EUR on dips, helped to pull the rug from under the EUR, resulting in a fairly sharp lunge lower. While it is easy to jump on the bandwagon expecting a further sharp fall this week, it may be worth taking some caution given the extent of short market positioning.

Admittedly officials in Europe are not too worried, and quite rightly so, given that the currency remains overvalued and still far too strong. Moreover, FX options market have also not reacted too much to the move, suggesting that for most, the decline in the EUR is not something to be too excited about. The underperformance of European data releases relative to the US over recent weeks adds further ammunition to those calling for a weaker EUR and assuming this divergence in data performance continues, the EUR will find it difficult to sustain much of a recovery.

Meanwhile the JPY continues to remain firm despite the generally firm USD tone this year. The JPY did give up some ground at the end of last week but shows little inclination to head back above the 78.0 level. Japanese official worries about JPY strength were evident in comments from Finance Minister Azumi who rolled out the usual mantra that they were watching FX market closely. He also expressed growing concerns about the drop in the EUR, highlighting concerns about the impact on Japanese exports as EUR/JPY drops to multi year lows.

Unfortunately for Japanese officials it appears that the EUR will get weaker and at least over the short term, the JPY stronger. EUR/JPY looks set to drop to its October 2000 low around 89.00 over coming weeks against the background of continued pressure in the Eurozone and elevated risk aversion.

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