Nicole WillingThe status of the Japanese yen (JPY) as a safe-haven currency has driven volatility on the forex market in 2020, with its value spiking earlier in the year as the Covid-19 pandemic sparked an economic crisis. The euro (EUR) has been driven by the region’s economic and governmental response to the pandemic, and while the EUR/JPY pair has changed little year-to-date with a 1.7 per cent gain, the pair has rebounded by 8 per cent from its lows of the year.
The yen and the euro are the two most-traded currencies in the world after the US dollar, the global reserve currency, presenting investors an opportunity to profit from that liquidity by trading the pair. That makes EUR/JPY predictions of particular interest to investors.
Our EUR/JPY analysis provides an overview of the currencies as investment assets, what influences their value and what the latest forecasts from investors suggest about the direction of the market heading into 2021.
The basics: what investors need to know about the EUR/JPY pair
The EUR/JPY currency pairing represents how many Japanese yen – the quote currency – are needed to purchase one euro – the base currency.
The Japanese yen is considered a safe-haven currency because of the stability of Japan’s economic policy over a period of decades. Japan has the world’s largest holding of foreign investment assets. In the meantime, the euro is the common currency used in 19 of the 27 member countries of the European Union (EU) to conduct cross-border business and is traded as a proxy for the health of the European economy.
The euro to Japanese yen is a popular cross-currency pair, which is an exchange rate that omits the US dollar and offers investors the opportunity to profit from portfolio diversification.
Factors that influence the value of the EUR/JPY pair
The key drivers to consider when trading the euro against the Japanese yen are the state of the global economy, political and economic developments in Europe and the attractiveness of the yen carry trade. The carry trade involves investors borrowing funds in the low-yielding yen to finance investments in higher-yielding assets, typically in the US or Europe. During times of economic uncertainty, investors typically unwind their carry trades, selling the higher-yielding assets to buy back the yen, in turn pushing up the value of the currency.
However, the economic crisis spurred by the Covid-19 pandemic has prompted central banks around the world to cut interest rates to record lows, reducing yields relative to the yen and thereby reducing the attractiveness of the carry trade.
The European Central Bank (ECB) has cut the main deposit interest rate for the eurozone to a record low of -0.5 per cent, compared with Japan’s main interest rate of -0.1 per cent, putting the yen in the unusual position of being the higher-yielding currency. The euro has been driven this year by what has been perceived as a more decisive response to the pandemic than the UK and US, and unprecedented economic stimulus by the central bank. Over the longer term, the European currency has also been affected by developments in Brexit negotiations with the UK.
EUR/JPY price analysis: economic and political uncertainty drives volatility
The EUR/JPY exchange rate has fallen heavily since 2008 when the global financial crisis saw the unwinding of the carry trade strengthen the value of the yen. The EUR to JPY rate was above 160 in early 2008, dropping to a 12-year low of 97 in 2012. The euro had strengthened to the 145 level by 2014, but the impact of the Brexit referendum in 2016 on the euro pushed the rate down to 114. While the rate reached 135 in 2018 it declined on slowing activity in the eurozone, falling from 126 at the start of 2019 to approach the 120 level by the end of the year.
The volatility of the exchange rate this year has seen the pair fall from 120 at the start of 2020 to 114 in May, the lowest since April 2017, on increased inflows into the yen and broad weakness in the euro. But Japan also faces tough economic conditions. The currency rate moved up to 126 as the yen weakened in late August when Japanese Prime Minister Shinzo Abe resigned citing health concerns.
The EUR/JPY pair has since been trading in a range of 121.90-124.90, rising from the low end of that range towards the top end so far in November.
So what do current macroeconomic conditions suggest for the EUR/JPY forex forecast?
EUR to JPY forecast for 2021: will the euro appreciate faster than the yen?
Forex analysts expect the euro-yen exchange rate to remain relatively stable in the near term.
Analysts as US-based Citibank see the Bank of Japan’s policy on interest rates as keeping a lid on the value of the yen. “The new political environment is likely to be more conducive to JPY appreciation. However, the likely timing of the BoJ’s first rate hike may delay to April 2025, which may restrain the JPY,” they said in a recent note.
Citibank’s three-month EUR/JPY forecast puts the rate at 125, rising to 131 in the next six to 12 months.
Analysts at France’s BNP Paribas Wealth Management expect the stability to continue, with a 12-month euro/yen forecast of 124:
“We do not expect a significant change in the political trajectory since Yoshihide Suga took over as new prime minister. Monetary policy should remain very accommodative, a strong mobilisation of public spending and the implementation of structural reforms are also expected.”
Currency analysts at ING similarly have a short-term EUR/JPY price prediction of 122, with a 12-month forecast of 125: “Helping to keep a lid on the EUR over the last couple of months has been ECB rhetoric on unwelcome currency strength.”
They said in a recent note: “This comes at a time when core inflation is just 0.2 per cent YoY and the ECB can credibly threaten to add more stimulus – probably via a €400bn top-up to PSPP in December. The BoJ won’t like JPY strength either (eg, USD/JPY under 105), but the JPY trade-weighted index is 5 per cent off its highs and some of the recent FX gains in big trading partners like China and Korea might make Tokyo a little more tolerant of JPY strength.”
“The EU economy is set to suffer through an ugly winter of Covid-19 lockdowns,” while there is a “tough path to JPY strength when financial conditions are going maximum green and EM is strong,” said John Hardy, head of FX Strategy at Denmark’s Saxo Bank.
That pressure on both currencies could make it difficult for either one to break out in the near term, maintaining the exchange rate in a narrow range.
What is your view of the EUR/JPY outlook? Are you prepared to take a trading position on the pair?
Read more: Nikkei 225 forecast and analysis
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
