The Odyssey? of EUR/JPY

Findings in a 12 sample, 8,000 + exchange rate study to encompass pre and post 2008 periods to determine the structural and positional relationships between and among EUR/USD, USD/JPY and EUR/JPY are many and varied.

As the most widely traded cross pair every year since reported in Triennial Surveys from 2001 and dated as far back as 1996, EUR/JPY embarks on periodic journeys, known periodic expeditions alongside definitive start and stop dates. The type of attachment EUR/JPY assumes with either EUR/USD or USD/JPY determines the period markets trade. From 2000- 2008, EUR/JPY shared an exclusive statistical relationship with EUR/USD in risk on markets as EUR/USD is a risk on currency pair. In the tested tenure from 1/5/2000 – 7/4/2008, EUR/USD traveled 6044 pips from 0.9773 to 1.5817 while EUR/JPY surged 6776 pips from 102.08 to 159.84.

USD/JPY concludes the triangular relationship for the same time frame as USD/JPY reciprocated because the statistical parallel between EUR/USD and EUR/JPY was substantially adverse. USD/JPY began 1/2000 at 101.51, bounced to 135.09 on 1/2001 then ended its time on 7/2008 at 103.65 for a 3144 pip drop.

As a consequence of the August 2008 market crash and the beginning of the next test series from 7/4/2008 – 4/15/2014, EUR/JPY transferred its allegiance from EUR/USD to USD/JPY in a new risk off market cycle, a duration that holds to the current day. The assumption is the first term lasted 10 years from the 1998 Asian crisis to the 2008 crash while the current period is in its seventh year and ongoing. August 2016 marks not only the eigth year since EUR/JPY and USD/JPY began their association but a new risk on episode is close when EUR/JPY again transfers its loyalty back to EUR/USD in risk on markets.

The correct measurement is the point of departure in EUR/JPY. August 2008 represented a wholesale positional change in EUR/JPY therefore the start date to view a periodic change is August 2008 othwerwise its possible to see over and /or undershoots in target prices and exchange rates due from skewed data. So precise and perfect is the currency price, an over or undershoot is impossible unless the calibration is deficient.

As an aside to add structure to the concept of market periods and not addressed in the current study, larger market protractions generally last about 50 years then comes a wholesale economic and sometimes political change. In the official 1982 US Gold report for example, Gold Vs Free Float currency epochs general durations are roughly 50 years dated from the 1500’s. If the December 1971 Smithsonian Agreement is measured as the free float commencement date, the current period enters year 45. Year 50 doesn’t prognosticate an imminent or guaranteed reversion to the Gold standard but it warns the next 50 year cycle caused possibly by war, economic collapse, political instability or all of the above is upon us.

Inside the 50 year interval are mini crashes, market changes and allows EUR/JPY to perform its function as not only a cross pair arranged as two opposite pairs but it also allows currency markets to be fully self contained entities because EUR/JPY trades inside EUR/USD and USD/JPY. Markets shift therefore cross pairs change allegiance as its intended purpose in design, construction and market function. The 2008 shift was a result of a market crash inside a duration of 10 years.

Its assumed the prior periods endured from the 1987 Louvre Accords to 1998 then from the 1971 Smithsonian Agreement to the 1985 Plaza Accords. EUR/JPY and EUR/USD reached maximim peaks in 2008 and USD/JPY its bottom. Therefore its also assumed the crash was a means to speed the newly arranged marriage between EUR/JPY and USD/JPY rather than take time through trading, time and structural statistical adjustments. An abundance of information was provided to discern a big big move was imminent.

Market crashes is a fascinating topic in currency markets but not well known because the modern day free float is in year 45 while the prior periods were dominated by Gold standards. The optimal comparison must include another 50 year free float time because currencies are priced in interest rates rather than Gold. The commonality from 1971 is a market event or crash occurs in 10 year intervals. If 50 year periods are viewed as 12.5 years then possibly 10 year time frames may be understood contextually as major turning points in currency markets but also switches in EUR/JPY, at least in the modern day 50 year term. The comparison in any period short or long term is found in FX Points, Forward Points or better known as the interest differential.

If Carry Trades are defined as interest differential income and price appreciation then the Forward Point or FX Point characterizes the actual trade. The Forward Discount defines the cost to carry the position or the Borrow side. The appreciation side is the premium but both exemplify the FX Point or interest differential. The goal in carry trades is to earn more FX Points than is paid to derive compensation to offset price depreciation in long positions. Synonymous terms exists in currency trading with slight deviations in its definitions: Forward Discount, Uncovered Interest Parity and Interest differential. The interest differential is translated to an FX Point. EUR is valued today at 132.54 and JPY at 0.0075. European Eonia trades today at 1.0192 and Japanese Call Rates trade 1.0760. JPY minus EUR translates to + 56 FX Points and minus 56 points as EUR minus JPY. In the forward market and a gauge to a current Carry trade based on FX Points, EUR/JPY should trade 132.59 – 132.48.

EUR/JPY is a currency pair whose price movements are best described long, short and intraday terms as wave patterns or possibly cycles as its purpose is to trade inside the bounds of EUR/USD and USD/JPY and never to leave the parameters. To trade direct center classifies the market as perfectly neutral and a rare day in the larger EUR/JPY picture. EUR/JPY waves because its movements are subject to the impulses of EUR/USD and USD/JPY.

Brian Twomey