What’s Really Driving the Value of the Euro and Yen?

Here Come the Europeans
Perhaps noting the initial success of the BOJ, the European Central Bank (ECB) announced details of its own plan for aggressive asset purchase on January 22, 2015.¹ While the euro initially fell against the yen on the announcement, we have yet to see any meaningful change in relative inflation expectations. This can primarily be explained by the slight delay until March for actual asset purchases in Europe to begin. In our view, if the ECB is able to have a similar impact on the markets’ perception of inflation, the Bank of Japan may need to announce additional measures to keep the euro from depreciating compared to the yen.

Portfolio Implications
While it is possible that currency markets may look to other factors to drive relative valuations, QE in Japan and Europe represents clear positives for risk assets around the world. As the U.S. seeks to tighten monetary policy, the combination of stimulus efforts from the BOJ and the ECB should continue to lift markets. Additionally, with global economic momentum possibly turning the corner in the second half of 2015, investors should consider hedging currency risk in order to protect returns from fluctuations in currency markets.

Unless otherwise noted, source for data is Bloomberg.

¹Source: ECB, as of 1/22/15.