The euro's venture into uncharted waters against the yen suffered a setback this week but its uptrend is not over yet, though there are question marks about its longer-term sustainability.
Technical analysts who study price charts see further upside for the euro against the yen above 158 yen, especially when taking into account the Deutschemark's pre-1999 performance against the Japanese currency. J.P. Morgan technical analyst Robin Wilkin said the bias on euro/yen was still on the upside.
"We've had a target of 162 yen but we are probably getting towards the end of the easy part of the trend, now we're closing in on those targets," he said. The single euro zone currency made successive record highs against the yen on two days this week as the euro zone's robust monetary policy outlook continued to dwarf that of Japan.
Bank of Japan rates stand at just 0.25 percent compared with 3.5 percent in the euro area. Moreover, the European Central Bank is expected to tighten policy more aggressively than the BoJ this year. A euro rally last month faltered but gains built again, leading the pair to breach 158 yen decisively this week as investors demonstrated heavy use of the yen to fund purchases of foreign assets with more attractive returns - otherwise known as carry trades.
The unwinding of these carry trade positions in the last couple of days has given way to questions over how much further euro/yen can go as the strength of the overall longer term rally appears to be fading, but technical analysts say at least one more hurrah is on the cards.
Barclays Capital analyst Phil Roberts said that Wednesday's near one percent drop from a record peak of 158.61 yen marked a key reversal of its recent uptrend, but said investors were unlikely to take that as a cue to offload heavily.
"Because the trend over the last six months was so strong, it's not uncommon to see the market bump against the higher levels," he said. "We're probably going to go up, not as high as 162 - I'm looking at maybe 159 or something like that but thereafter I would be very concerned that we're close to a top," he added.
Because euro/yen is at heights unprecedented since the euro's introduction in 1999, a number of analysts have resorted to looking at pre-euro Deuschemark levels for guidance. They are looking at key resistance around 162.42 yen, which equates to 83.04 marks using the euro conversion rate of 1.95583 Deutschemarks.
"I think it (the euro) will test 162.42 - the yen is still weak shorter term, the trend seems to be resuming as another new high was confirmed technically," CBCM analyst Andy Hart said.
He added that current euro/yen levels were also some way off the historical Deutschmark/yen high of 146.00 reached in December 1979, which would equate with 285.55 yen. J.P. Morgan's Wilkin said the 162 yen upside target in euro/yen had been driven by bullish targets for sterling/yen. The pound rose to a 14-year peak above 241 yen this week before giving way to profit-taking as carry trades were unwound.
Wilkin said potential problems for euro/yen could come from broader euro/dollar moves. "We are seeing potentially the first signs of a turn in the dollar - we're looking for the dollar to make a reasonable recovery into the back-end of Q1 and maybe into Q2," he said.
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