The latest version of extend and pretend is seeing a dramatic squeeze higher in JPY crosses as USD and JPY longs head for the exits. Where from here?
The move on the heels of the EU statement overnight is seeing a tremendous squeeze on long USD and long JPY positions. JPY crosses are moving the most as USDJPY bottomed and reversed sharply overnight and fixed income is selling off sharply (JPY is the most sensitive to interest rates) – at least at the EU core, in the UK and in the US futures. At the EU periphery, we’ve got a huge rally in bond markets today as the Spanish 10-year yield is over 50 bps lower this morning from yesterday’s close, and Italy’s yield is some 40 bps lower.
The measures announced (as described, for example in this Bloomberg article are going a long way to provide immediate relief in the key peripheral spreads, but all of what has so far been announced is mere fancy footwork aimed at throwing more debt (via the ESM and EFSF, which after all, are funded by….EU sovereign debt) at a debt problem. So the question for EURJPY (and EURUSD for that matter) is whether this lasts 24 hours or 2 days or two weeks – it’s not a solution, merely another extend-and-pretend scheme. The longer term questions for the EU (fiscal union or no, ECB’s role, etc..) remain unanswered.
Chart: EURJPY
An impressive rally in the EURJPY, but will there be enough to take it beyond the June highs for any length of time? Bears should remain cautious until we see a strong reversal pattern – perhaps an immediate reversal or a move back below the blue kinjun line for the Ichimoku-inclined
John J Hardy,
SAXO BANK