EUR/JPY is the EUR/JPY spot exchange rate, which represents the price of one euro in Japanese yen. Exchange rates tend to appreciate when central banks remove monetary stimulus. The prime example of this trend is the euro zone’s move to tighten monetary policy in the aftermath of the 2007-2009 financial crisis.
The chart shows that the EUR/JPY exchange rate has been steadily gaining ground since the start of the financial crisis. JPY was the main currency used by international investors in the region, and it had long been the leading currency used to fix the exchange rate between Japan and Germany, which is where EUR/JPY originates. Since then, however, the EUR/JPY exchange rate has steadily climbed in value and has largely followed a similar pattern to the euro-dollar exchange rate. As a result, the EUR/JPY spot rate has gradually increased to equal the euro/dollar spot rate.
On June 25, the Euro-Japan Exchange Rate Mechanism, or EURJIM, shifted its prime currency pairs, such as the EUR/JPY, from JPY/JPY to JPY/JPY. The EUR/JPY rate should theoretically appreciate by approximately 10 basis points in the transition, but in practice, it is likely to be less than half of that level. EUR/JPY pair tends to trade in a narrow range, and the two rate paths have already converged. Although EUR/JPY has not entered the normal upward path of upward or downward movement, it has steadily increased since its pre-financial crisis value of 124.65, and the narrowing of the exchange rate is likely to encourage some investors to convert JPY currency into EUR.
Before entering any trades involving EUR/JPY, it is important to assess the security market risk. Currency pairs are generally bought and sold through brokers. Since the volume in the financial market tends to be relatively small, such transactions can be difficult to detect. Depending on the broker, the security june be available on the exchange that trades JPY pairs or it june be limited to European forex markets.
Trading EUR/JPY pairs with other brokers using options is more likely to cause an excessive trading activity in the foreign currency exchange market. For these trading models, broker dealers typically require the buyer to execute the options for the entire amount of the purchased currency pair. This requires a broker to manage more currency pairs than the broker june actively trade itself. For these kinds of trades to be traded, the option trading platforms must be updated regularly, but broker dealers often need additional time to meet such requirements.
Another risk is currency pairing errors. For example, the EUR/JPY pair could appear incorrectly to be priced in dollars. Although the EU cannot see the actual trading position of an investor in its foreign exchange markets, the Commission has started legal proceedings against a trader because the transaction was incorrectly priced in euros.