In a previous article, we looked at USD/JPY and while we think the USD will go down, we view EUR/JPY as having more potential for the reasons in this article...

   Japan's top currency diplomat Masando Kanda said that Japanese authorities won’t rule out any options in the currency markets in terms of halting speculative selling of the Yen which as we note in yesterday's article intervention or a change to the yield curve control – the reason we like the look of EUR/JPY over USD/JPY is due to speculative positioning:

“In terms of G3 currencies, we might see some re-adjustment - Speculators still seem to be holding onto long euro positions, while they continue to run very short positions against the yen on the carry trade. USD/JPY upside now looks more limited as rhetoric from Tokyo threatens imminent intervention.” (INGTHINK)

Sentiment

As EUR/JPY is a cross we can look at both EUR/USD where speculators are heavily long of the EUR and USD/JPY where speculators are heavily long of the USD and short of the JPY which we can see on the charts below:

Creating the Cross-Data 

The COT Net Traders Positions only show the majors but on our website, we create a spreadsheet of crosses and express the positions as simple ratios and we get the following:

Large speculators: Are 7.7 to 1 in terms of longs over shorts.

Commercial Hedgers: Are 3.8 to 1 in terms of shorts over longs.

The divergence is + 11.50. Any divergence above + 10.00 in our experience indicates an overbought or oversold situation and we see EUR/JPY as a bullish extreme.

At turning points or trend changes, commercial hedgers tend to be" smart money" as they will only move their hedges if positions have moved too far from fair value and they have heavily sold the EUR and JPY. large speculators, on the other hand, can be right about long-term trends but tend to get caught at major trend changes and they are heavily long the EUR and short the JPY. The EUR is overbought and we are likely to see a reversal to the downside.

Fundamentals

The market expects the BoJ to continue with an ultra-loose monetary policy so the bad news for the JPY is in the price but in terms of the euro as we note in our article on EUR/USD the market sees another rate hike from the ECB and the economy avoiding a long and deep recession – We dont agree with this view but even if it is correct the good news is in the price for the Euro.

We expect a major move to the downside in EUR/JPY as the large number of speculators who are short are taken out on stop.

Technical Analysis

Our view of the key levels of support and resistance to look out for are on the chart below.