The EUR/JPY (euro v. Japanese yen) currency pairing is called a currency cross, in Forex parlance. It is traded a lot by currency traders and by spread betters, and can be analysed to some extent by looking at the EUR/USD and USD/JPY and what drives them. Obviously, there is a direct relationship between these three pairings.
The main influences on the exchange rate are the interest rates and the economic growth in each region, but analysis is complicated by the fact that the euro represents the economies of many countries. A further factor is the price of oil, as Japan has to import about 99% of its oil supplies. The typical daily range of the EUR/JPY is about 100 pips.
The economic situation in Europe has led to the expectation of rising interest rates in the region. This is a natural consequence of money deserting what is perceived to be a poor investment, the euro, which means that the interest rate must be raised to make it more attractive to hold the currency. While the strongest economies, principally Germany with France in reserve, are powerhouse operations, the involvement of some very poorly run countries such as Greece will affect the whole EEC and therefore the euro. The interest rate is set as a target rate by the European Central Bank, which endeavours to keep control of the disparate parts of the region.
Apart from interest rates, other influences on European economies are the many different unemployment rates and the impact of inflation, particularly on exports and trade. Europe is dependent as a whole on net imports of gas from Russia and oil from the Middle East, so any other demands on these resources will affect the euro.
The Japanese yen is even more dependent on imports such as oil. The small island of Japan has a great deal of manufacturing, as a glimpse on the street or in the hi-fi store will attest, and raw materials have in large part to be imported for processing. The yen is perhaps the strongest of the Asian currencies, given the success of Japanese products around the world, and is often run to as a safe currency when fear grips other regions.
Another play that is used by traders is to set up carry trades, where the usually lower Japanese interest rates allow borrowing that is invested in other countries with higher interest rates for a profit. The Bank of Japan is actively involved in currency management, and frequently attempts to weaken the currency so that exports from the country do not become too expensive, hurting the Japanese economy.
Finally, Japan had a real estate bubble long before the western world, and suffered deflation in the 1990s, and the memory of this influences Japanese decision making.
With so many influences on this currency pairing, it can be confusing to attempt to explain let alone anticipate the price movements. One answer to this is to concentrate on technical analysis, taking care to be out of the market any time that consequential announcements are due. Technical analysis will always give a clear indication of the market sentiments.
Spread Betting on the EUR/JPY Rolling Daily
The euro vs. Japanese yen currency pairing is very popular, and an interesting pairing to follow, combining as it does many Western countries in Europe with the leading country in Asia, which provides many of the goods that Europeans buy. The current spread betting quote for a daily bet is 10,610.3 – 10,612.0. If you thought that the Japanese yen will be stronger than the euro in the next few days, you might want to take out a short bet on this pair, that is a bet against the euro and in favour of the yen. Say you staked £7.50 per point. A sell bet goes on at the lower price quoted, so the bet is opened at 10,610.3.
If you had judged correctly, after a few weeks you might find that the quote was 10,482.6 – 10,483.9, at which point you wanted to cash in your winnings. You can work out how much they are like this: –
- your bet was opened at 10,610.3
- your bet was closed at 10,483.9
- the total number of points you gained was 10,610.3 less than 10,483.9
- so your short bet made 126.4 points
- As your stake was £7.50 per point,
- your total winnings are 126.4 times £7.50
- which is £948
On the other hand, the euro might have strengthened after you placed your bet, and you would be faced with the decision to close your bet for a loss, before the potential losses became too high. Say the currency pair went to 10,665.6 – 10,666.9, and you closed your bet for a loss.
- your bet was opened at 10,610.3
- your bet was closed at 10,666.9
- the total number of points you lost was 10,666.9 less 10,610.3
- so your short bet lost 56.6 points
- As your stake was £7.50 per point,
- your total loss is 56.6 times £7.50
- which is £424.50
That illustrates a short or sell bet, which should cost you nothing in ongoing fees. The alternative, a long bet, can result in you being charged every night a small amount of interest as your bet is rolled over to the next day. Provided you only plan to make short term bets of a few days or weeks, the charges will not be high.
So this time say you place a long bet, deciding that the euro will strengthen against the yen, and stake £8 per point. If you are right, you might find that you can close you bet and collect your winnings when the quote is 11,025.4 – 11,036.9.
- Your bet was opened at 10,612.0
- The bet closed at 11,025.4
- The difference is 11,025.4 – 10,612.0
- So you gained 413.4 points
- At your chosen stake, this amounts to £3307.20
Once again, you might have got it wrong, and lost on your bet. Say you decided to cut your losses when the spread quote was 10,432.5 – 10,433.8.
- Your bet was opened at 10,612.0
- The bet closed at 10,432.5
- The difference is 10,612.0 – 10,432.5
- So you lost 179.5 points
- At your chosen stake, this amounts to £1436.
Spread Betting on the EUR/JPY Futures
The EUR/JPY (euro versus Japanese yen) is a popular currency pair to trade, and is currently 10,110.7 – 10,121.4 for a futures based contract five months away. As a reminder, you are not charged any interest for holding onto this bet right up to the expiry date, but you can cash it in as soon as you want if you win your target amount, or if you have to close it on a stop loss if the price goes against you.
Suppose you are long on the Japanese yen, with this pairing you would have to take a short position, betting against the euro. Place a bet for £12 per point. The bet goes on at the selling price of 10,110.7. If we assume that the price goes down, you might close your winning position at a price of 9983.2 – 9993.9. A short bet closes at the higher price of 9993.9. Here is how you work out how much you have won: –
- The bet opened at 10,110.7
- The bet closed at 9993.9
- The difference in points is 10,110.7-9993.9
- Therefore you have won a total of 116.8 points
- Multiplying this by your stake of £12 per point, you win £1401.60
Whenever you place a bet, you must be prepared for it to fail. Say the price went up to 10,189.5 – 10,200.2, and you decided that you had to close the bet to minimise the cost.
- The bet opened at 10,110.7
- The bet closed at 10,200.2
- The difference in points is 10,200.2-10,110.7
- Therefore you have lost a total of 89.5 points
- Multiplying this by your stake of £12 per point, you lost £1074
As another example, suppose instead you were bullish on the euro, and bearish on the yen. As the euro is the first mentioned currency, this would be a long bet or buy bet. Your bet for £7.25 per point goes on at the buying price of 10,121.4. If it works out, you might close your bet when the price was quoted at 10,315.6 – 10,326.3. You work out your winnings in the same way: –
- The bet opened at 10,121.4
- The bet closed at 10,315.6
- The difference in points is 10,315.6-10,121.4
- Which is 194.2 points
- Your stake was £7.25 per point
- Therefore you won £1407.95
One of the major principles you must learn if you are going to make a success of betting on the financial markets, is that you should not risk losing too much capital on any single bet. Many traders consider that 2% of your funds is as much as you should be prepared to lose, and use that guideline to decide how big a bet to make. If this long bet fails, and the price falls, you should be prepared with the price that you can afford to let it go down to. Say it was 10,082.5 – 10,093.2, and you close the bet to limit your loss.
- The bet opened at 10,121.4
- The bet closed at 10,082.5
- The difference in points is 10,121.4-10,082.5 4
- Which is 38.9 points
- Your stake was £7.25 per point
- Therefore you lost £282.02