Yen Rallies Against the Euro as Investors Turn

Yen Rallies Against the Euro as Investors Turn
February 13, 2016

 
The EURJPY is a major cross currency pair, which has declined by more than 10% in the past eight months. The Euro dollar and the Japanese Yen represent two large and important economic zones. Thus, any major developments in these two zones would be closely watched not only by analysts, but also traders who would like to benefit from the corresponding price moves.

The Euro dollar currently stands at the same level where it was eight months back. However, the Japanese Yen had strengthened considerably. Fundamentally, this has resulted in the decline of the Euro against the Japanese Yen. To determine the likely trend in the future, we shall first analyze the most important factors, which affect the value of the Euro and the Japanese Yen.

Historically, the EURJPY currency pair has a tendency to decline whenever there is a slide in the stock market. In particular, the Euro tends to weaken whenever the German stock market (DAX) declines. The reason is that Germany is the strongest economy in the Euro zone. From a high of 12,390 points in April, 2015, the DAX had fallen to 8,967 points on February, 2016. The index is expected to go down to its major support at 8,000 points. Such likelihood continues to put pressure on the Euro.

Traditionally, whenever volatility increases in the US stock market, the investors begin looking for safe haven investments. The Japanese Yen is always considered as a low risk investment vehicle. As investors start purchasing the Yen, it becomes stronger. Such a scenario has brought the EURJPY down from a high of 141.04 in June, 2015 to a low of 125.76 in February, 2015.

Secondly, a rise in the US interest rates would theoretically strengthen the US dollar. Given the gloomy economic scenario, the market believes that the Fed would not think of another hike at least during the first half of the year. Only a rate hike would weaken the JPY and strengthen the US dollar.

The BoJ (Bank of Japan) continues to do all that is possible to weaken the Japanese Yen. However, barring few spikes, the Yen continues to get stronger. Even the surprise move to negative interest rate on January 29, 2016, resulted only in a temporary weakening of the Yen. Thus, logically, we can expect the EURJPY to move further downwards.

Technically, as shown in the image below, the EURJPY has broken the crucial support of 130.03. The price has fallen below the 50-day moving average. Next major support exists at 124.75 levels.

EURJPY Technical Analysis - 13th February 2016

A temporary bounce back till 129.15 levels is expected, considering the steep fall so far. Thus, a forex trader can go short at around 129.15 levels with a stop loss above 130.03. The short position can be closed at 124.75 levels. A binary options trader should purchase a put option with March end expiry. The suggested strike price for the put option is 129.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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