My trade of week on CNBC’s Money in Motion on Friday was to sell EUR/JPY. It was a jam-packed show and my window to talk about the trade was short. Therefore I want to take this opportunity to explain in further detail why I really like this trade, particularly since its finally rebounding and could potentially trigger an entry.

On the show, I said trading EUR weakness through EUR/JPY is the best of both worlds because we can take advantage of

1) Lower EUR for European Weakness
2) Stronger JPY for risk aversion, weaker global growth, and softer Chinese data

The great thing about trading EUR/JPY is that it benefits from a sell-off in the EUR/USD or a sell-off USD/JPY so if this week’s FOMC minutes confirm that QE3 is still on the table, it will also help our trade.
If you know me, then you know that when I identify trades, I always look at it from 3 perspectives:

1. Fundamentals
2. Technicals
3. Sentiment

1. Fundamentals

a. Spanish bond yields back on the rise and I don’t expect much from Monday’s EZ Fin Min meeting, which should be bearish for EUR
b. Renewed expectations for QE3 should weigh on the U.S. dollar with the FOMC minutes as a potential catalyst for driving USD/JPY lower
c. If this week’s Chinese data surprises to the downside it could set off a wave of risk aversion that will drive the JPY higher

2. Technicals

a. EUR/JPY Broke 1 month low which opens the door to a move down to 97 and possibly even a move below 96 (as Todd Gordon pointed out). As you can see in the chart below, EUR/JPY is in a “downtrend” according to my Double Bollinger Bands. While 97 is my target, theres no real support in EUR/JPY until the 11 year low of 95.60.

3. Sentiment

a. Investor sentiment or what I call the “flow” is on our side with the sharp sell-off in EUR/JPY.

EURJPY is the quintessential “risk off” trade, which means that it traditionally underperforms when investors are nervous and given the extreme pessimism of the ECB and other central bank officials, the possibility of weakness could raise the level of anxiety in the market and help my EUR/JPY trade call.
These were the levels that I provided on CNBC

Sell EURJPY at 98.25
Stop at 99.00
Target 97.00

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.