The strengthening of EUR/JPY is a combination of the EUR expansion and a weakening of the JPY together, however, it seems that this move is largely driven by the EUR, given that the EUR/USD moved sharply higher through June while the USD/JPY was relatively stable.
The Yen is currently trading at the same level as the US Dollar as it did in early May. USD/JPY started trading at 107 in May, compared to the recent closing price of 106.90. Meanwhile, the EUR/USD remains significantly higher, the May opening price at 1.0950 compared to the recent close of 1.1300.
In general, the expansionary monetary policy usually softens the value of a currency in the short term, because an increase in liquidity or an increase in the money supply, usually reduce funding costs. However, macroeconomic, performance differences, and separately the demand for mechanical changes, such as repatriation of capital and changes in global risk sentiments and collective assessment of regional political and economic risks (trusts) are responsible for the larger, long-term movement.
But the current conditions are different, as we are currently experiencing in the midst of a pandemic and economic turmoil, the market seems to have lost interest in short-term pricing. As you know, in mid-May, there was speculation that the European Central Bank will expand the Pandemic Emergency Purchasing Program by 500 billion euros, in early June the figure was confirmed as 600 billion euros and at the European summit this week there was a proposed expansion of the proposed program which is the proposed €750bn Recovery Fund. Events like this have fueled sentiment towards the recovery of the euro exchange rate in recent months.
The ECB has updated its economic projections, projecting the Eurozone economy to contract -8.7% in 2020. Changes that are significantly different from previous estimates for real GDP growth + 0.8% before, in March 2020. It seems that initial speculation for an increased ECB intervention, combined with validation in June, helped the EUR to move higher on the back of easing Eurozone pessimism.
The strengthening of the Euro against the Yen is an indication of the risk-on mode. The FX market, however, seems calm, with cross-risk FX classics such as USD/JPY and AUD/JPY now trading fairly stable in line with the beginning of Q1 2020.
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