EUR/JPY weakens as stimulus from China comes back into trade, weighing on the yen

• China’s extraordinary stimulus package has supported emerging FX markets, reviving carry trade.
• This weighs on the yen, which is a popular funding currency for the carry trade.
• BoJ commentary and weak Eurozone data weigh on EUR/JPY.

EUR/JPY is trading in the 160.20s, up nearly 0.40% on Tuesday, after China’s announcement of substantial new stimulus measures revived the carry, which hurt the Japanese yen (JPY), the most popular funding currency for this type. of trade.

A carry trade is an operation where traders borrow money in a low-interest currency such as the yen (about 0.25% APR) and use the money to buy a currency with a high interest rate such as the Mexican peso (10.75%). APRIL).

The carrier profits from the difference between the costs of servicing the loan and the interest earned. Because the yen is so popular as a financing currency, the increase in commercial shipping can be a negative factor. China’s stimulus package has revived the carry trade as it has had the side effect of supporting emerging FX markets such as the Mexican peso (MXN), making the trade even more profitable.

EUR/JPY is down from the day’s high of 161.11, however, due to a speech by Bank of Japan (BoJ) Governor Kazuo Ueda that helped strengthen the yen. The Euro (EUR) lost momentum on weaker data from Europe’s largest economy, Germany.

Kazuo Ueda was moderate (meaning in favor of raising interest rates) in his comments early Tuesday. He said if inflation continued to rise in line with the BoJ’s latest forecasts, it would mean the bank would raise interest rates – a positive for the yen.

“We will raise the interest rate if the economy (and) prices move in line with the forecasts presented in our quarterly outlook report,” Ueda said.

A below-expected result for September’s German IFO business sentiment index, a survey of 7,000 businesses, further acted as a headwind for EUR/JPY.

Both the IFO index for business climate and current valuation fell below both previous readings for August and below economists’ forecasts. Meanwhile, the IFO expectations index matched forecasts but was still lower than the previous month’s reading. The data reinforces the view that the German economy is at risk of falling into recession.

The euro lost ground across most of its pairs on Monday after HCOB Purchasing Manager Index (PMI) data showed a sharp drop in activity in the eurozone economy, with the composite PMI slipping from expansion to contraction.

In contrast, Japan’s Jibun Bank PMI, while showing a slight decline in manufacturing, showed a slight increase in Services sector activity.