Synopsis:

While both the Japanese yen and euro have rallied ~12% against the US dollar this year, BofA believes the underlying drivers are not equally durable. The euro's rise looks more structurally supported, whereas the yen's strength appears more vulnerable to reversal, particularly if US-Japan trade talks progress.

Key Points:

1. Speculative Overcrowding in JPY:
   The yen’s rally has been fueled by rising speculative positioning, leaving it more vulnerable to positioning squeezes—especially if talk of a US-Japan currency agreement gathers steam.

2. EUR’s Rally More Regime-Resilient:
   The euro has outperformed more consistently across market regimes, showing greater momentum durability than the yen.

3. Fundamental Euro Tailwinds:
   The EUR rally is anchored in idiosyncratic strength, notably Germany’s fiscal shift, providing a more solid and persistent macro backing.

4. BoJ Policy and Hidden Outflows:
   The yen’s rise has occurred despite waning expectations of further BoJ tightening and little focus on Japan’s sustained structural outflows, which still persist quietly under the surface.

Conclusion:

BofA argues that EUR strength is more fundamentally grounded and less crowded, while JPY gains are prone to retracement, particularly if US-Japan trade negotiations revive FX diplomacy headlines. They suggest upside potential in EUR/JPY as the relative narrative tilts in the euro’s favor.