SocGen sees selling EUR/JPY as the best short-term trade, given the divergence in Eurozone vs. Japan growth expectations. While USD/JPY remains strongly correlated to 10-year US yields, the broader JPY strength case is intact as US equities soften and Treasury yields edge lower.
Key Points:
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Strong Correlation Between USD/JPY & US Yields
- USD/JPY has maintained a tight correlation with 10-year US yields.
- Relative growth expectations now matter more than relative rates.
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EUR/JPY Disconnect from Fundamentals
- Eurozone growth expectations are deteriorating relative to Japan.
- Despite this, EUR/JPY is trading at the same level as a year ago, creating a misalignment.
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Short-Term Trading Strategy
- Given weak Eurozone growth expectations and Japan’s improving outlook, the best trade now is to short EUR/JPY.
- The market may soon adjust to reflect the economic divergence between the Eurozone and Japan.
Conclusion:
SocGen recommends selling EUR/JPY as a short-term trade, citing the striking deterioration in Eurozone growth expectations versus Japan. Even if US yields remain rangebound, JPY strength should persist, making EUR/JPY a prime short candidate.
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This article was written by Adam Button at www.forexlive.com.
