Updated: Oct 9, 2021
Europe has been hit hard by the constant lockdowns during the pandemic. Consumer confidence in the vaccine has caused a weaker than normal vaccine programme which resulted in longer lockdowns than anticipated.
On top of this energy prices have sky rocketed causing huge inflation on a major household cost, power. This kind of inflation does not go unnoticed by the ECB which will likely react by potentially increasing interest rates, stopping quantitative easing which is deflationary and bullish on EUR/JPY.
Overall, on the technology summary tool we're seeing a quick glance at what the fundamental data is suggesting for EURJPY.
What we've concluded is a massive shift from strong to weak economic data for JPY and a shift from weak to strong data for EUR. This can be seen on the currency strength meter crossover last month... this past few days EUR has started to bare further bullish data suggesting a potential upside move.
Other than the currency strength meter we're also seeing the following bullish signs on the:
GDP differential indicator
Interest Rate Differential Indicator
Hedge fund positions (COTA)
All the stars aligning have created this bullish view... but does the market agree and how can we spot the signs if they are.
Lets find out.
GDP Differential Indicator
The GDP differentials were suggesting both an expansionary 2021 and 2022 for both Europe and Japan. In this case we can see in the solid blue line for Europe showing much stronger forecast growth rates in comparison to Japan. This is suggesting a bullish move in favour for EURJPY.
Overall, agreeing with the macro currency strength meter mentioned at the start of the analysis.
Trade Analysis (Imports/ Exports)
We've included Volkswagen (VW) as a company to analyse for EURJPY... why you may ask. Cars and automobiles are a huge export and import for Europe. Some of the most well known vehicles come from Europe and one of the largest most successful of those companies is Volkswagen. Importing and exporting millions if not billions worth of goods.
What we've found over the past 6 months is VW has surged significantly, cars have been in a slight shortage overall which has increased the cost of vehicles. This increase in price has created better profit margins for VW.
The past couple of months we've seen VW prices start to correct which suggests EURJPY may follow suit disagreeing with our currency strength meter.
Ideally, we'd be expecting VW prices to start breaching 300 which would create a bullish bias in line with the currency strength meter.
Toyota is another car manufacturer but this time one of the largest in the east. Toyota has also seen prices rise significantly over the past year following a similar correction to VW. This shows that both car manufacturers have a positive correlation to EURJPY and both showing a slight dip in performance the past two months.
This could suggest that the trade analysis is not there just yet and we'd want to wait for both VW and Toyota to show bullish signs.
Finally we have WTI, both Europe and Japan are huge importers of oil from around the world. Again, we can see a positive correlation for WTI against EURJPY. However, WTI again shows a dip in prices suggesting that maybe EURJPY is going to experience some downward pressure for a while.
Overall, the trade analysis disagrees with the bullish move.
Interest Rate Differentials
The interest rate differentials are at all time lows. Europe have super low interest rates holding zero and Japan have even lower interest rates, negative rates! In this case, the differential is slightly in favour of EURJPY so we can gather from this a very slight bullish sentiment from interest rates in favour of EUR.
Stock Market Analysis
Finally, we have our stock market analysis which we've chosen the STOXX600, 600 of the top companies across Europe. Pricing the index in JPY to gauge in comparison how wealthy Europeans are in comparison to Japan. What we've seen is the stock market rising significantly, taking a slight dip in 202 but with a much stronger rebound.
If this momentum is to continue we may see the risk on investor sentiment take place as companies look to expand, employ more people and create more profits.
Hedge Fund Positioning (COTA)
What we can gauge from the Commitment of Traders Analysis (COTA) tool is that hedge funds are both selling the Euro and the JPY. However, they are selling more JPY than EUR which could be seen as slight bullish in favour.
Overall, there's no certainty on market sentiment. What we'd be waiting for is the blue solid line for EUR increase in open interest above 0 which shows that hedge funds would be buying the EUR. This could indicate a long term trend.
Market prices on EURJPY have been falling over the past few months. Recently hitting a slight area of support which could see prices rise again after the correction.
The market has been in an uptrend which is a positive sign for our fundamental outlook.
What we're looking for in this area is any sort of technical signs of bullish movements to confirm our conviction from fundamental data.