The call lines up two forces that are moving in opposite directions: falling euro-area front-end yields as markets pare ECB hike bets, and a yen supported by prospective BoJ tightening and safe-haven demand. The cross is exposed to further risk-off episodes, because a rise in volatility tends to accelerate carry unwinds funded in yen. A renewed widening in French spreads would likely be the trigger for the next leg lower. Conversely, any sign that forced OAT selling is exhausting, or that the French budget passes smoothly, could spark a sharp short-covering rally in the euro. The Iran war’s energy price shock adds to Japan’s import bill, which could temper the yen’s gains if oil spikes again.
—
Earlier:
—
MUFG is betting that France’s bond market troubles will cool the ECB’s appetite for hikes just as the BoJ warms to them, a combination that leaves EUR/JPY with room to fall.
Summary:
- MUFG recommends a new short EUR/JPY: entry at 177.50, target 172.00, stop-loss 181.50.
- The pair has regained downward momentum after breaking back below 180.00.
- A widening French-German bond spread is tightening euro-area financial conditions, reducing the need for aggressive ECB hikes. Hike pricing to mid-2027 is down around 30 basis points from its peak.
- MUFG expects another BoJ rate hike before year-end, narrowing yield gaps. The yen could also benefit from carry-trade unwinds if volatility rises.
- The main risk is a stabilisation in European bonds, as MUFG sees the French selling as forced and overdone.
MUFG has recommended a new short EUR/JPY trade, entering at 177.50 with a target of 172.00 and a stop-loss at 181.50. The bank argues that euro-area fragmentation risks and a hawkish Bank of Japan point to further downside for the cross.
The bank noted the pair has regained downward momentum since breaking back below 180.00 in recent weeks.
On the euro side, MUFG said the spread between French and German bond yields has blown out more sharply than expected, leaving the single currency vulnerable. Spreads have also widened in Spain, Greece and Portugal. The resulting tightening in financial conditions reduces the urgency for the European Central Bank to raise rates as aggressively as markets expect. ECB President Christine Lagarde said on September 28 that higher long-term yields would slow growth and reduce inflation pass-through by more than projected. Pricing for ECB hikes by mid-2027 has since fallen around 30 basis points from its peak. MUFG expects more such pushback if the bond sell-off resumes, which would likely weigh further on the euro. Options flows have also turned among the most euro-negative in recent periods, suggesting markets are pricing a lasting French political risk premium.
For the yen, MUFG expects the Bank of Japan to deliver another rate hike before year-end, though probably not this month, narrowing yield differentials with the euro area. The yen could also gain if market volatility rises further and triggers an unwinding of yen-funded carry trades. The yen and Swiss franc were the best-performing G10 currencies in the week to October 2 as risk aversion intensified.
The main risk to the trade is a stabilisation in European bond markets. MUFG views much of the French bond selling as forced and overdone, and said a calmer backdrop could prompt a reversal. A move above 181.50 would invalidate the idea.
This article was written by Eamonn Sheridan at investinglive.com.