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EUR-JPY – This is the forex quote for the Euro vs. Japanese Yen exchange rate. EUR (the ‘base currency’) is quoted in terms of JPY (the ‘counter currency’). The Yen is a historically low-yielding currency, making an attractive vehicle to fund carry trades (where traders borrow cheaply in JPY to buy higher-yielding currencies, including EUR. Investors tend to favor carry trades at times of optimism about global economic performance and stability; they shun them at times of market stress. This makes EUR/JPY sensitive to swings in broad-based market sentiment trends. The pair may likewise find volatility in news-flow related to the Eurozone debt crisis as well the extraordinary anti-deflation policy efforts from the Bank of Japan introduced in 2013.
The major significance and importance of cross currency triangulation is due to the fact that many spot currency cross pairs are not traded against each other in the interbank market as standard pairs. With a realignment of the currency markets due to the adoption of the euro, cross currency pairs such as the EUR-JPY, GBP-CHF, GBP-JPY and EUR/GBP, as well as many other cross currency pairs, developed over time, for many reasons. Major companies, importers and exporters, governments, investors and tourists, all needed a method to simultaneously transact business in euros, while allowing for money and profits to repatriate back to their home currencies.
Notice that none of the base currencies in these pairs is a nation that has adopted the Maastricht Treaty, and therefore rejected adoption of the euro. With the European Union’s implementation of Rule 1103/97 on Sept. 11, 1997, a formal legality existed for calculating conversions to euros. This rule also established convertibility to six, then three, decimal places and the adoption of triangulation as the legal norm for transacting business in the eurozone. What this legality gave to investors, traders and bankers was a new means to trade currencies, with a whole host of new profit opportunities. For this article, the focus will be about triangulation as a means to trade and profit. (For background reading, check out our Forex Tutorial.)
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