LIVE MARKETS-End of euro yen alignment incoming, buy euro say BofA

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END OF EURO AND YEN ALIGNMENT INCOMING, BUY EURO SAY BOFA

The euro and yen have been two of the best performing developed market currencies this year, each having appreciated around 12% on the dollar.

They've not quite moved in lockstep, but it's pretty close - euro/yen has fallen just 0.4%

But analysts at BofA think this could be going to change as the gains in the yen are more fragile than the euro and so they recommend buying a euro/yen one year call option.

They have a few reasons. These include

- Speculative positioning is heavily net long for both the euro and yen, but BofA say the yen long is even more stretched - leaving scope for a snap back.

- Part of the reason for the stretched positioning is market expectations of a U.S.-Japan currency deal that would cause the yen to strengthen further. BofA think however a trade deal without a currency clause is more likely.

- The euro has strengthened pretty much regardless of the market environment this year, whereas the yen has appreciated sharply when investors are firmly risk off and/or focused on Fed easing, but weakened in other environments.

- The euro took a boost from the positive news about German fiscal expansion. Japan's scope for more spending is much more limited.

- Markets have been paying less attention to structural outflows from Japan, even though they are continuing.

(Alun John)

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