EUR/JPY rose for a second session, changing hands near 185.70 in early European trade, after Germany’s seasonally adjusted May Trade Balance surprised to the upside. The surplus widened to €19.1 billion, the largest since February, beating the €14.8 billion consensus and following an upwardly revised €14.7 billion in April. Exports increased 0.9% month on month despite forecasts for a 0.3% fall, while imports declined 2.5% against expectations of a 0.1% rise, after a 1.1% gain previously.
The rally faced potential constraints as talk of Japanese foreign exchange market intervention gathered pace, a factor that can underpin the yen. The Bank of Japan’s quarterly report kept its overall view unchanged, describing most of its nine regions as “recovering moderately”. It also said many areas saw firms, including smaller enterprises, deliver substantial wage hikes this year, while some warned higher pay may be hard to sustain, and companies continued price rises to offset higher labour and distribution costs, with further increases for food and daily essentials under consideration from this summer.
Germany’s Trade Surplus Supports Bullish EUR/JPY Outlook
We see the EUR/JPY continuing its upward path, strengthened by Germany’s impressive trade surplus. The data suggests underlying economic health in Europe’s largest economy, which reinforces our bullish view on the Euro for now. This fundamental strength could provide fuel for the pair to test even higher levels in the near term.
Heightened Intervention Risks and Options Strategies
However, we must be extremely cautious as the pair trades near 185.70, a level not seen in over 15 years. This makes the risk of intervention by Japanese authorities incredibly high, as they have historically acted to curb excessive yen weakness. We are closely watching for verbal warnings from finance ministry officials, which typically precede any direct market action.
Given this setup, we are using options to structure our trades. Buying EUR/JPY call options allows us to participate in further upside while strictly limiting our maximum loss to the premium paid should intervention cause a sudden, sharp reversal. The implied volatility has risen to reflect this tension, making strategies like bull call spreads attractive to reduce the cost of entry.
For those with existing long positions, we recommend buying put options as a direct hedge. Japanese intervention can be swift and severe, as seen in the Spring of 2024 when authorities spent a record ¥9.79 trillion to defend the currency, causing rapid price drops. Securing protection against a similar event is a prudent measure to lock in recent profits.
