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EUR/JPY Forecast 29 May 2013

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EUR/JPY chart 29/05/2013
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Euro dips in midweek trading

In today’s analysis we are focusing the attention of binary options investors to the kinky pair of EUR/JPY. You might question the usage of the word “kinky”, but it is exactly how we feel about it these days. Volatility is off the charts with so many structural transformation going on in the Japanese bond market as long as turbulent data out of the EU. The EUR/JPY started trading in the US session around 130.90 after falling from overnight highs in Asia around 131.70.

Steps to lift the Eurozone out of recession

Fresh loath of data released on Wednesday confirmed that the ECB is rightfully worried about lending to small and medium sized businesses and a negative deposit rate step although risky might prove to be desirable.

The ECB reported earlier on Wednesday that loans to the euro zone's private sector contracted for the 12th month in a row in April, piling up on the European Central Bank to take additional steps to lift the Eurozone out of recession. Loans to the private sector contracted 0.9 percent from the same month a year ago which was a slightly worse than the expected outcome.

The central bank has pumped in liquidity into the banking sector, but that has not transformed into better financing and loan conditions for businesses particularly in the peripheral part of the Euro Zone mired in recession. After the net amount of loans falling by 2 bln EUR in March, April brought a much steeper decline of 18 bln Euros.

In a separate report released by the German Labor Office - the number of Germans out of work jumped more than forecast to 21000 with only 5000 expected. The drop was reported to be seasonal – due in most part to bad weather. Unemployment rate remained steady and the Euro remained rather resilient on the news. The rate stayed at 6.9% - a reunification low.

On a positive note more Germans should take home bigger salaries in the next couple of years as many unions secured some substantial wage rises. Expectations are for this step to boost domestic demand and consumption in Germany while reducing competitiveness hence providing a much needed boost for the peripheral Eurozone.

Whilst Japan by and large has completed the inevitable balance sheet adjustment as long ago as 2003 after its "lost decade" it is still dimmed in deflation, and fiscal consolidation planned for 2014 will keep the foot on the brakes. Although continued easy money points to a structurally weak JPY in the long run, we are favoring to buy puts on the EUR/JPY in the current environment.

Looking at the chart we are observing the rate trading around 130.64 as of writing. We expect a short term bounce up towards resistance levels around 131.20-30, followed by another leg lower towards 130 JPY. Strategically speaking we advise selling daily puts around 130.20-30 in the EUR/JPY pair.

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