Although the Euro did experience a tremendous bounce following the latest European Central Bank monetary policy decision, the Yen continues to strengthen on the back of no additional measures from the Bank of Japan after the economy managed to narrowly avoid another recession. Challenging global trade conditions combined with persistent deflationary pressures at the doors of most advanced economies have diluted the impact of aggressive policy measures designed to insulate against these developments. With the ECB likely to be more assertive as the results of asset purchases are made clearer, pressure on the Euro might have just begun as the Bank of Japan holds off on further adjustments as they await the impact of the federal reserve rate hike decision.

The Fundamental Perspective

Looking back on the past year, some important changes have come about on the level of monetary policy, especially from advanced economies. While the Euro was largely beat up because of the implementation of looser policy measures, the Bank of Japan largely stood on ceremony, avoiding for the most part expanded asset purchases in anticipation of Federal Reserve tightening efforts. Nevertheless, the precipitous fall in the Euro has led to a 1-year return of -9.82% for the EURJPY as increased efforts to restore European economic competitiveness eat away at Japan's ultra-loose policy gains. Besides the Yen strengthening from lack of additional liquidity injection, growth is actually showing stronger resolve, especially with the economy managing to avoid the fifth recession in seven years. Although inflation is not expected to hit the targeted 2.00% for an extended period of time, the Bank of Japan is confident in the outlook, in stark contrast to it peer the European Central Bank.

All bets are off now that the Federal Reserve has gone on a tightening spree, meaning that policy in Japan is unlikely to be changed, especially with the likely incremental gains that will come from a stronger dollar. Europe on the other hand continues to struggle to restore growth as numerous factors prevent monetary policy from having a more beneficial impact. Aside from weak fiscal policy and no fiscal stimulus, highly indebted regional countries are starring down deflation. Although there has been a measurable rebound in European fundamentals thanks to the aggressive actions of the European Central Bank, more must be done to meet the mandate of price stability. This could involve expanding existing asset purchases by an additional €15-20 billion per month from the current level of €60 billion. Should the European outlook deteriorate further, it raises the specter of additional action, and renewed weakness in the Euro likely to weigh on the EURJPY pair.