During European hours on Monday, EUR/JPY displayed volatility around the 163.00 level. This movement was influenced by improved global risk sentiment, following US President Donald Trump’s announcement of moderate tariffs on Chinese imports.
The current 20% tariffs on affected goods, including semiconductors, will remain. These rates are notably less than the initially proposed 145% duties.
Merz’s Proposal for Zero Tariff Agreement
German Chancellor-in-waiting Friedrich Merz expressed worries regarding Trump’s economic strategies. He suggested a new trade agreement with zero tariffs, aiming for mutual benefit.
Despite Euro gains, Japanese Yen strength is maintained by safe-haven demand amid US-China trade concerns. Prospects of a US-Japan trade deal and potential Bank of Japan policy adjustments further support the Yen.
Japan’s Prime Minister Shigeru Ishiba emphasised the potential global economic disruptions from US tariffs. He assured Japan’s commitment to working closely with Washington on trade matters.
Terms like “risk-on” and “risk-off” depict risk appetite levels in markets. During “risk-on” phases, risky assets like stocks rise, while “risk-off” periods favour safer investments.
Market Reactions and Implications
Currencies linked to commodity exports like AUD and NZD generally rise during “risk-on” phases. In contrast, USD, JPY, and CHF appreciate in “risk-off” environments due to perceived economic security.
What we’ve seen so far with EUR/JPY dancing around the 163.00 mark is by no means a random flicker. When Trump’s administration opted for just a 20% tariff instead of the more aggressive 145% originally floated, it injected a bit of calm into markets that had been uneasy about an escalating trade spat. While semiconductors remain on the tariff list, traders all over welcomed the climbdown, seeing it as a signal that tensions might not spin entirely out of control.
Merz, soon to be at the helm in Berlin, voiced concerns likely shared by most in the euro area. By floating the idea of a tariff-free agreement, he’s signalling that Europe wants a more cooperative trade framework, not further barriers. That idea, of fairer and more open trade, may act as a stabiliser for the euro if negotiations gain traction in coming weeks.
At the same time, safe-haven buying hasn’t let up. The yen is staying strong, not just because of general caution over US-China developments, but also due to whispers about upcoming changes from the Bank of Japan. That, paired with potential agreements between Tokyo and Washington, is enough to keep inflows pointed towards the yen. What’s important here is that while the euro has shown resilience, the yen’s strength tells us that a layer of defensive positioning remains widespread.
We also heard from Ishiba, Japan’s Prime Minister, who didn’t mince words about the broader implications of protectionist tariffs. His message was pointed – unless handled well, these policies have teeth that bite beyond just the US and China. His commitment to coordination with Washington should be noted carefully, as this suggests we might see aligned moves or messaging in upcoming statements, which could influence short-term price action.
For those positioned in derivatives, it’s worth remembering how “risk-on” and “risk-off” behaviours reveal broader shifts in global mood. When investors feel safe, they move towards higher yield assets like equities or emerging market currencies. In contrast, when uncertainty creeps in—as we’ve seen recently—money tends to flock towards more dependable options like the US dollar, the Swiss franc, or indeed, the yen.
One should keep an eye on yields too, especially in connection with JGBs (Japanese Government Bonds) and European equivalents, as they may signal how much faith traders are putting in the respective central banks amid recent rhetoric and broader trade anxieties. Yield differentials often underpin currency moves, especially for those taking leveraged or short-term rate-sensitive positions.
With AUD and NZD still sensitive to commodity cycles and global trade flows, any fresh moves in tariffs or supply disruptions could trigger sharp moves. If we notice copper or LNG prices shift meaningfully, it’s likely to reverberate through those currencies quickly, given their export dependency.
In such conditions, options traders might consider volatility strategies around EUR/JPY, especially with implied vols still moderately priced, offering potential upside on gamma plays. Likewise, spreads involving JPY against higher-yielders could offer asymmetric risk-reward, particularly if safe-haven flows persist.
For now, the tone may be one of cautious optimism, but the persistence of USD and JPY demand implies that any rallies might need more than a single news cycle to stick. Markets continue to respond sharply to trade-related cues, so any unexpected language or policy moves out of Washington, Berlin, or Tokyo could create new entry points or demand for quick adjustments.
