(Bloomberg) -- Euro-yen is getting increased attention as policy divergence between the two regions looks set to offer opportunities in the currency pair.
Strategists at Rabobank, Nomura Securities Co. and Mizuho Securities Co. are among those who see euro-yen dropping to as low as 140 to 150 by the end of next year. It hasn’t been in that range since June 2023, and currently hovers around 164.
The European Central Bank is expected to keep cutting rates as the region’s economy sputters, with another quarter-point reduction next month baked into overnight-indexed swaps. Meanwhile, markets see about a 50% chance of a hike next month by the Bank of Japan.
Relatively higher interest rates generally boost a currency because they attract capital seeking better returns, so the divergence has traders betting on relative strength for the yen versus the euro.
“The Bank of Japan will probably carry out multiple rate hikes through the first half of next year,” said Jin Moteki, a currency strategist at Nomura. “So if that happens, the rate differential will continue to move in the direction of a stronger yen against the euro.”
Mizuho has an end-2025 forecast of 140 for the pair, a level which hasn’t been seen since March 2023. While Rabobank agrees the euro could weaken against the yen, its year-ahead projection is slightly higher.
“We expect that a more dovish ECB will strip the euro of its resilience next year and we see scope for EUR/JPY to drop back toward 150 on a 12-month view,” said Jane Foley, head of FX strategy at Rabobank, in a note on Friday. “The euro zone is also suffering from structural problems and a deficiency of investment.”
The situation has also given some strategists a greater sense of clarity about the direction of euro-yen versus the dollar-yen, as the uncertain pace of the Federal Reserve’s rate cuts and Donald Trump’s imminent presidency provide wild cards in terms of the currency’s performance.
From the derivatives side, Societe Generale strategists Olivier Korber and Kit Juckes recommend financing bearish euro-yen strategies by selling low strikes — basically, reducing the cost of the trade while also capping gains — or setting up a bearish knock-out, a point at which the position would be closed out if the market reverses.
--With assistance from Masaki Kondo and Michael G. Wilson.
(Updates with detail in third, fourth and last paragraph.)
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