How To Trade EUR/JPY
As mentioned, the USD is present in all the major currency pairs because it has the status of world reserve currency. This was established in 1944 during the Bretton-Woods agreement and nobody can change that. The currency pairs that are formed by popular and liquid currencies other than the USD are called cross pairs. EUR/JPY is one of these and it does not depend on the USD performance.
You may think that EUR/JPY is fluctuating on the difference between the EUR/USD pair and USD/JPY, which are two majors that are inversely proportional. However, oftentimes it is simply about the direct changes in the EUR/JPY based on some European economic indicators or Japanese policies and economic achievements. Moreover, the Japanese Yen can be influenced by the stock market performance.
As for the euro, it is directly related to the European economic state and reports. In fact, everything that happens inside the euro area is really important, even the social events like terrorist attacks.
Here are the most significant European economic reports to consider:
- The European Central Bank (ECB) meetings that are organized eight times every year. The meetings are generally followed by press conferences and the future expectations and plans are partially or fully revealed.
- The interest rate decision is also important, but sometimes the press conference after the bank meeting can make more sense because it reveals the sentiment and the insider atmosphere, which is very important for an objective assessment of the economic health.
- Purchasing Managers Index (PMI) report is published every month and it indicates the state of manufacturing and services sector, giving hints on what the ECB may decide during the next meeting;
- Consumer Price Index (CPI), which is in fact the inflation, is really important because the central bank tries to maintain inflation below the target level of 2%. If the CPI would go out of the expected ranges, then the ECB would have to act in one way or another.
Important Economic Releases To Watch In Europe
If we are referring to Europe, it is essential to consider the consumer price index (CPI) as it shows the inflation level, and we mentioned above that the ECB is doing all the possible to keep a certain inflation level in order to make the economy work properly.
The purchasing manager index is considered to have a similar importance because it indicates if the manufacturing or services sector has a positive or negative trend. The PMI is also considered by the European Central Bank when it decides the monetary policy and explains their position, which may be hawkish or dovish.
Don’t forget about the GDP growth and the unemployment data. The Gross Domestic Product shows directly the economic evolution of the European Union, while the unemployment level is a key indicator that shows the social involvement in the economic processes. As of today, the unemployment level maintains to the lowest levels since 2009, but any increase in unemployment may weaken the European currency against major pairs, including Yen.
Anyway, the main reason why you should monitor the European reports month by month is to get an idea about what the ECB may decide during its next meeting. Whenever the CPI show lower than expected figures, then inflation drops and the ECB is forced to cut interest rates, which makes the European currency less attractive and the EUR/JPY pair may drop.
Important Economic Releases To Watch In Japan
As of Japan, it is not difficult to guess what the main things to watch are. Yes, it is about the Bank of Japan meetings, press conferences and any message related to them. The central bank is the main driving force in any country because it simply decides the economic path of a country. This is why Japan is no exception. You should pay particular attention to what the Bank of Japan has to say about the Japanese bond buying program.
It is a known fact that the Japanese bond buying program, or the quantitative easing as they call it in Europe, is the most intense program of its kind. If you want to make an impression, think about the fact that it exceeds the US program by three times, yet the Japanese economy is only half of the US one.
This is why the Bank of Japan actions are even more important than any reports and economic indicators. Every speech, conference, interview and message coming from a Bank of Japan member should be closely watched because this will have an impact on the JPY.
The typical economic reports such as the consumer price index, GDP growth, Tankan index, and so on, are also considered potent drivers of the EUR/JPY cross, but they don’t reach the degree of consideration accredited to stock market changes and the Bank of Japan decisions.
In Japan, the interest rate and inflation have the same relationship like in any other country – whenever the inflation goes up, you would expect the interest rate to be raised as well, and vice versa.
What To Expect From Economic Releases
You should know that the EUR/JPY cross pair is more volatile than the EUR/USD pair. This is because the Japanese currency is very sensitive to any stock market changes in Tokyo. You may compare its volatility to the GBP/USD pair.
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References and Further Reading:
- Simple trend-following strategies in currency trading (Jessica James)
- False Euro (FEUR) exchange rate correlated behaviors and investment strategy (M. AusloosK. Ivanova)
- Corporate cash flow and stock price exposures to foreign exchange rate risk (Söhnke M. Bartram)
- Optimization of the trading rule in foreign exchange using genetic algorithm (Akinori Hirabayashi, Claus Aranha, Hitoshi Iba)
- Computing currency invariant indices with an application to minimum variance currency baskets (Nikolai V. Hovanova, James W. Kolari , Mikhail V. Sokolov)