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The Decline of the EUR/JPY Reflects Escalating Geopolitical Risks

David Becker
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The Euro is beginning to break down against the Yen, which is a reflecting of the geopolitics and the demand for a safe haven such as the yen. The cross currency pair has been under pressure for the past week and is quickly approaching support levels that could generate a liquidation that could push the Euro lower again most major currencies.

Geopolitics is beginning to escalate. The downing of the Malaysian commercial plane over Ukraine last week represents both an escalation of conflict as well as increased pressure on Putin to bring the insurgents to heel. The tragedy of both the incident and the immediate aftermath may very well prove to be a turning point of sorts in the broader crisis. Russia is likely to find itself more isolated.

Russian capital markets are vulnerable, but officials there have incentives and plenty of resources to conceal the extent of the impact. These events have bolstered the yen and if not treated quickly could continue to spiral.

It could harden Europe’s attitude and presage a new round of sanctions. Despite the cynics’ dismissal of the strategy, this type of sanctions regime is relatively new, and the asymmetries of exposures and threat perceptions make coordination difficult. Nevertheless, the long-game strategy is raising the cost of Russia’s behaviour.

The EURJPY is trading near weekly support at 137.00. The next level of target support for the currency pair is seen near 136, and then the October 2013 lows at 131. Momentum on a weekly basis has turned negative, as the MACD (moving average convergence divergence) index has generated a sell signal. This occurs when the spread (the 12-week moving average minus the 26-week moving average) crosses below the 9-week moving average of the spread.

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