The Euro to Japanese Yen exchange rate has dropped as the Yen strengthens. This shift stems from growing expectations of a rate increase by the Bank of Japan (BoJ) in December. Japan’s 10-year bond yield has hit a 17-year high, reflecting these expectations. Meanwhile, the Euro faces difficulties due to stagnant retail sales, which showed no growth in October and did not meet forecasts. However, there was a yearly increase of 1.5%, slightly surpassing what was predicted. BoJ Governor Kazuo Ueda’s recent comments have heightened speculation about a rate hike in December. Inflation data show that Tokyo’s Consumer Price Index rose by 2.7% in November, aligning with expectations. When excluding food or both food and energy, inflation remains steady at 2.8%, surpassing forecasts. A Reuters report indicates a possible rate increase that the Japanese government might accept, pushing Japan’s bond market to new heights.

The Yen’s Market Performance

The Yen’s strength is apparent against many major currencies. This rise is in line with market expectations of a change in the BoJ’s monetary policy, which could affect currency values and bond yields in the future. The growing gap between the BoJ’s hawkish stance and the cautious approach of the European Central Bank presents a clear opportunity. We view the upcoming BoJ meeting on December 19th as a significant event that may boost the Yen against the Euro. Derivative traders should prepare for a continued decline in the EURJPY pair over the next few weeks. The market is increasingly confident about a BoJ rate hike, with overnight index swaps indicating an 85% likelihood of at least a 15 basis point increase this month. This feeling is supported by the Japanese 10-year government bond yield rising over 1.9%, a level not seen since 2007. This strong market sentiment suggests that options pricing will indicate high volatility leading up to the meeting.

Eurozone Economic Sentiment

On the other hand, the Euro is struggling to gain momentum due to weak economic data. For example, the recent German ZEW Economic Sentiment survey unexpectedly dropped to 8.5, revealing ongoing pessimism. With inflation risks appearing more balanced for the ECB, there’s little urgency for action, reinforcing the policy divergence between Europe and Japan. It’s important to note how long it took for Japan to shift its policy after exiting negative interest rates in early 2024. Given the clear trend, buying EURJPY put options with expirations in late December or January seems to be a wise strategy. This approach allows investors to engage in the anticipated downturn while clearly defining risks before the BoJ’s announcement. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now