MUFG recommends short EUR/JPY, targets 172 as French bond stress and BoJ hikes weigh
The desk aims to capitalize on MUFG's recommendation to short EUR/JPY, highlighting shifts in euro-area yields and prospective BoJ policy changes as critical factors. Per the full note, declining euro-area front-end yields are driving down ECB hike expectations, while the yen is buoyed by anticipated BoJ tightening and safe-haven demand. This scenario positions EUR/JPY for further downside, with MUFG setting an entry at 177.50, a target of 172.00, and a stop-loss at 181.50. As volatility rises, the environment becomes more conducive to carry unwinds funded in yen, particularly if French bond market strains escalate, tightening euro-area financial conditions.
What the desk is arguing
The thesis revolves around the expectation that EUR/JPY is set to decline due to mixed developments in European and Japanese monetary policies. The recent hike pricing has diminished, with expectations for the ECB moving down around 30 basis points from its peak, reflecting a less aggressive stance in response to French bond market stress.
Additionally, MUFG anticipates another rate hike from the BoJ by year-end, which could narrow the yield differential between the euro and yen, further supporting the short trade. As noted, the pair has regained downward momentum after breaking below the 180.00 level, which reinforces the bearish outlook among traders.
Where it sits in our coverage
The median consensus target for EUR/USD across firms is 1.1634, with a range from 1.1200 to 1.2000, and key firms targeting December 2026 include: - socgen: 1.1400 - rb: 1.2000 - barclays: 1.2100
This view diverges from our cross-firm consensus, as MUFG's short EUR/JPY call aligns with shifting market sentiment regarding the ECB's hiking trajectory. Given the current positioning and consensus, the desk’s target at 172.00 appears towards the lower end of expected forecasts, reflecting a more bearish outlook than many peers.
How other firms see it
Aligned firms like socgen and cibc foresee a steadier euro amidst these developments, while bofa and ing present contrary views supporting a stronger euro scenario. The sentiment oscillates, with some firms remaining optimistic about Eurozone resilience.
Tracking the EUR/USD trajectory is pertinent here, particularly as it mirrors broader ECB rate expectations and potential shifts in risk sentiment—that dynamic contributes to the volatility in the EUR/JPY cross. Also, watch for implications on USD/JPY as shifts in BoJ tightening could spill over into further dollar strength.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01MUFG's recommendation to short EUR/JPY is based on contrasting monetary policy expectations between the ECB and BoJ.
- 02A widening French bond spread is seen as critical to further downside in EUR/JPY, with potential triggers from escalating risks.
- 03Current market sentiment is bifurcated, with competing views on the euro's resilience amidst bond market turmoil.
- 04Expect a volatile environment that may impact carry positions funded in yen as risk-off sentiment rises.
Market implications
Monitor the 180.00 level in EUR/JPY, as a sustained break below could open the cross to move towards the target of 172.00. Additionally, any upcoming developments related to French bond yields could swiftly impact euro valuations, creating opportunities for position adjustments.
Risks to this view
The main risk to this short EUR/JPY trade is a stabilization in European bond markets. If forced selling of OATs shows signs of exhaustion or if the French budget passes without significant disruption, it could lead to a sharp rally in the euro, jeopardizing MUFG's outlook.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Citi | Bearish | 1.0850 |
Crédit Agricole | Bearish | 1.1300 |
Deutsche Bank | Neutral | 1.1668 |
The call lines up two forces that are moving in opposite directions: falling euro-area front-end yields as markets pare ECB hike bets, and a yen supported by prospective BoJ tightening and safe-haven demand. The cross is exposed to further risk-off episodes, because a rise in volatility tends to accelerate carry unwinds funded in yen. A renewed widening in French spreads would likely be the trigger for the next leg lower.
Conversely, any sign that forced OAT selling is exhausting, or that the French budget passes smoothly, could spark a sharp short-covering rally in the euro. The Iran war's energy price shock adds to Japan's import bill, which could temper the yen's gains if oil spikes again. --- Earlier: French stock market says 'au revoir' --- MUFG is betting that France's bond market troubles will cool the ECB's appetite for hikes just as the BoJ warms to them, a combination that leaves EUR/JPY with room to fall. Summary: MUFG recommends a new short EUR/JPY: entry at 177.50, target 172.00, stop-loss 181.50.
The pair has regained downward momentum after breaking back below 180.00. A widening French-German bond spread is tightening euro-area financial conditions, reducing the need for aggressive ECB hikes. Hike pricing to mid-2027 is down around 30 basis points from its peak.
MUFG expects another BoJ rate hike before year-end, narrowing yield gaps. The yen could also benefit from carry-trade unwinds if volatility rises. The main risk is a stabilisation in European bonds, as MUFG sees the French selling as forced and overdone.
MUFG has recommended a new short EUR/JPY trade, entering at 177.50 with a target of 172.00 and a stop-loss at 181.50. The bank argues that euro-area fragmentation risks and a hawkish Bank of Japan point to further downside for the cross. The bank noted the pair has regained downward momentum since breaking back below 180.00 in recent weeks.
On the euro side, MUFG said the spread between French and German bond yields has blown out more sharply than expected, leaving the single currency vulnerable. Spreads have also widened in Spain, Greece and Portugal. The resulting tightening in financial conditions reduces the urgency for the European Central Bank to raise rates as aggressively as markets expect.
ECB President Christine Lagarde said on September 28 that higher long-term yields would slow growth and reduce inflation pass-through by more than projected. Pricing for ECB hikes by mid-2027 has since fallen around 30 basis points from its peak. MUFG expects more such pushback if the bond sell-off resumes, which would likely weigh further on the euro.
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