EUR/JPY: Euro Buoyed by Positive Signs of Euro Zone Recovery

The Euro is deemed to outclass the Japanese yen today as signs continue to emerge that worst of the Euro Zone crisis has passed. A business survey suggested that the economy is recovery while the European Central Bank’s balance sheet shrank to the smallest in almost a year after banks started to repay emergency loans. In contrast, Bank of Japan Governor Masaaki Shirakawa’s move to leave office earlier than expected is seen to weigh further on the Yen.

Further evidence emerged yesterday that the economy of the 17-nation bloc started 2013 in better shape than many had expected. Markit reported that its purchasing managers’ index, a closely-watched gauge of growth, climbed to a ten-month high of 48.6 points in January from 47.2 points in December. Though the index remains below the 50-mark that would indicate expansion, the survey echoes other finds that the region could be over its worst, with manufacturing and services off their lows. Markit says the Euro Zone is showing clear signs of healing as the downturn seems to be easing considerably in January and the region moving closer to stabilization in the first quarter. The overall PMI for service firms, which account for almost half of the economy, also reached a 10-month high last month. More encouraging, a measure of business optimism improved to its best reading since May.

Meanwhile, the ECB’s balance sheet dropped 159.1 Billion to 2.77 Trillion Euros in the week ended February 1, its lowest level since February last year, as banks started repaying the three-year loans that the ECB offered a year ago to prevent a credit crunch. Analysts say that the repayment and the subsequent shrinking of the balance sheet are stark signs that the financial system across the region is healing. Today, additional buoyancy is expected as the Bundesbank is awaited to report that German factory orders recovered in December. Orders are believed to have inclined by 0.8 percent after plunging by 1.8 percent in November, signifying that manufacturing activity is apt to improve. With such trends supporting views of a return to growth this year, the Euro is deemed to maintain its strength.

Over to Japan, the BOJ Governor Shirakawa’s intention to step down three weeks earlier than expected are seen to accelerate an anticipated shift to more aggressive monetary easing in accordance with Prime Minister Shinzo Abe’s economic agenda. On expectations that under a new boss, the BOJ would act sooner to support the economy than earlier thought, the Yen is deemed to remain under pressure. Hence, a long position is recommended for the EUR/JPY trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.