The difference between Japan's imports and exports.
When you decide to trade on the foreign exchange market it is imperative that you understand the factors that make one currency more attractive than another in a pair. Among the major factors there are of course the interest rates of these currencies so it is necessary to know how to create an analysis to be able to determine if the rate of the currency pair will rise or fall. This is equally the case for the EUR/JPY.
The difference between Japan's imports and exports.
The economic strength of Japan and the Eurozone as well as the relations between these two economic zones.
The price of energy commodities, including crude oil, of which Japan is one of the main importers, and natural gas.
Natural disasters that can penalize Japan's economy and therefore the strength of its currency.
Government interventions in Japan and Europe to promote the economy, such as interest rates set by the ECB and the Bank of Japan.
Bond purchase programs, which is one of the most influential easing measures on the foreign exchange market, particularly with regard to the Yen.
The economic instability of the euro zone and all the news related to it will of course have an influence on the EUR/JPY rate.
ECB meetings, which take place 8 times a year.
Purchasing managers' indices, the consumer price index or even inflation figures.
The EUR/JPY currency pair represents the exchange rate of a Euro in Yen. It therefore gives the equivalent value of one Euro in Yen.
This currency pair is significant as it represents by itself nearly 3% of all transactions completed every day on the foreign exchange market. It is the 7th most traded currency pair throughout the world.
It should be noted that trading in the EUR/JPY currency pair is popular as it is one of the most volatile pairs on the market. It is for this reason that the EUR/JPY currency pair is particularly suitable for ‘scalping’. In fact, its historical volatility has in the past reached nearly 210 pips.
The entities responsible for determining the interest rates of currencies are of course the large central banks of each country or group of countries. Concerning the Euro it is the ECB, or European Central Bank, that is responsible. For the Yen it is the Bank of Japan that determines the rate.
The interest rates of these two currencies change regularly of course and information is published in the economic calendar regarding each movement.
The influence of interest rates on currencies such as the Euro or the Yen is as strong and large as the different rates relating to a currency pair. Therefore, a currency with a weak interest rate will be less expensive to buy and a currency with a strong interest rate will be more advantageous for resale.
It is therefore possible to implement an effective trading strategy using an analysis of these rates and by anticipating their movements to take or close positions.
To efficiently trade the EUR/JPY pair you should pay close attention to the various economical and political announcements that could be highly influential to this rate. However, news concerning the Euro has more of an impact here than that concerning the Yen as the single currency is the base currency of this pair.
In any case, the Yen has a certain particularity that should be taken into account to avoid making mistakes. In fact it is a currency particularly suited to the Carry Trade and even more so when it is paired with the Euro as adversary. It is actually the directing interest rate of the Yen, artificially maintained close to zero by the Bank of Japan, that favours the use of this currency to make profits through differential rates.
Please note: The Carry Trade is no longer the most popular way to trade the yen and particularly the EUR/JPY currency pair which remains heavily influenced by the European economy. Another point, the interest rates differential has strongly decreased over the last few years and in parallel the Yen has increased in value due to this trading method which has created a lack of competitiveness relative to the country’s exports recently.
When trading the EUR/JPY currency pair you should understand certain fundamental elements. For example, this currency pair is quoted on the Forex with two decimal places even though some brokers show the rates with three decimal places. The rate of this pair is called a floating rate as it is ruled by the law of supply and demand exercised on the Forex.
The monetary policy of these two currencies is implemented and controlled by these ruling financial organisations; the Central European Bank for the Euro, and the Bank of Japan for the Yen. It is important to note that the BoJ has the habit of regularly intervening on the foreign exchange market to artificially modify the rate of the Yen so favouring the export competitiveness of the country.
In a general manner, all publications emanating from one or the other currency controlling establishments will have an impact on the rate of the EUR/JPY currency pair.
Before you start trading on the EUR/JPY currency cross rate, you should keep in mind that the yen is a currency that has been considered a safe haven for a very long time. But what does this really mean?
When we speak of a safe haven value for a currency on the foreign exchange market, we are talking first and foremost about the currency of a country with a particularly stable over time and a relatively strong economy. This is of course the case of Japan, which has, in the past, demonstrated on many occasions its ability to emerge from major crises. Of course, the fact that the yen is a currency that is widely used in international trade is another element that makes it a safe haven.
But the yen is not just any safe haven in the foreign exchange market but is probably the most interesting at the moment. Indeed, compared to other monetary safe haven stocks such as the Swiss franc or gold, the yen enjoys a significant advantage in terms of its debt. This argument might seem strange when you consider that Japan is actually the most indebted country in the world with a debt level that reaches and even exceeds 225% of national GDP. The fact is that, compared to other countries, more than 90% of Japan's debt is held by the country itself and by the Japanese, while, for example, in the euro zone, less than 50% of the debt is held. The fact that Japan owns most of its debt means that it is not or only slightly affected by the vagaries of the financial markets with regard to its refinancing, even though global public debt is reaching record highs and the markets are increasingly influential at all levels. This specificity of Japan is unique in the world and in developed countries and leads to an additional interest in this currency on the part of investors.
Another element that makes the yen a low-risk security is the extremely large savings reserves that Japan has accumulated over time. These savings were made possible by the fact that Japan is still one of the world's largest exporters today.
Indeed, thanks to these specific characteristics in Japan, the yen is a currency that is often appreciated by traders in periods of major economic crisis, as shown by the historical graphs of the EUR/JPY or USD/JPY. For example, these graphs show that in 2008, as the subprime crisis is in full swing and the economic and financial crisis begins, there is renewed interest in the yen, which is recording many purchases on the foreign exchange market. The same will be true in 2011 in the midst of the debt crisis. Of course, and every time the situation improves and the crisis ends, we see a return to a decline in this value.
The relationship between the value of the yen and global economic health is a two-way street since the significant appreciation of this currency can be interpreted as a sign of a new period of crisis in the world.
While, as we have just seen with the safe haven status of the Yen, the EUR/JPY cross can be strongly influenced by global economic health, it is also under the direct influence of the Japanese economy.
Indeed, Japan is currently the fourth largest exporter in the world with more than $700 billion in exports per year. Among the most profitable and dominant sectors of activity in Japan is the automotive sector, which generates nearly 20% of its exports with both vehicles and spare parts, as well as the IT and technology sector, which accounts for nearly 7% of Japan's exports.
The observation of the evolution of the trade balance of this country is also interesting since it shows a sharp increase and is sometimes positive and sometimes negative. This variation in specific form is explained by the fact that while Japan exports a lot of goods, it also imports a lot of them, particularly raw materials such as oil, which accounts for more than 30% of the country's total imports.
It is also important to know that Japan's economy also depends to a large extent on the health of the Yen. Indeed, when the value of the yen tends to fall on the foreign exchange market, exports are favoured, which increases Japan's international competitiveness and thus tends to appreciate again. On the other hand, a yen that appreciates in value will eventually decline as it penalizes the country's growth by making it less competitive.
However, it can be noted that the Japanese economy has not shown significant variations for several decades now due to persistent deflation. However, the Japanese National Bank or BoJ is trying to reverse this trend by making quantitative easing measures that you will also need to take into account when analysing.
In conclusion of this article dedicated to the EUR/JPY, it can therefore be noted that the factors that influence this parity are many and varied. We will therefore consider both economic and political data from the euro zone as well as the safe haven status of the yen and Japan's economic cycles. But you should also closely monitor all announcements and decisions made by the ECB and BoJ central banks that have a direct influence on this cross. Finally, we will not neglect either the technical analysis which is essential in order to detect the strength and possible duration of a trend and which comes in addition to your fundamental analyses of these two currencies.