Since calling for a correction in the Euro back on February 10th after a steep rally, we have followed-up several times since to observe that the Euro/Japanese Yen currency cross continues to work through a constructive weekly chart bull flag consolidation pattern. Until that changes, and 120 is meaningfully breached and held below, the drama out of Cyprus and Europe is more or less just that. Even if 120 is lost, 110 and 105 are the critical levels down below to hold in order to solidify a major bearish to bullish reversal in the cross over the past several years.
Recall that while a strong Euro has often correlated with healthy global risk appetite, the Yen is often inversely correlated to global risk appetite, in no small part due to the “carry trade,” which essentially encourages arbitrage by borrowing Yen to speculate on other asset classes. Part of what caused such a disconnect in global markets during the 2007-2009 bear, and even at various points since then such as the Flash Crash in 2010, was the rapid unwinding of the Yen carry trade, leaving highly levered large market players trapped in suddenly huge losses.
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