An Analysis Of The EUR/JPY Price Formation Mechanism

This report analyzes the price formation mechanism of the EUR/JPY pair using a two-tiered model, concluding that it is significantly influenced by Japanese equity performance and risk preferences. The pair appears overvalued and potentially more vulnerable to risk asset corrections than USD/JPY.

Key Takeaways

• 1.EUR/JPY price formation is more strongly influenced by Japanese equities and market risk preferences than the USD/JPY.
• 2.The EUR/JPY pair currently appears overvalued based on the two-tiered regression model.
• 3.EUR/JPY is becoming increasingly vulnerable to corrections in risk assets compared to USD/JPY.

Table of Contents

• Limits and effectiveness of model analysis
• Two-tiered (double decker) model for EURJPY
• Observation of lower tier (base structure)
• Observation of the upper tier (superstructure)
• Risks preferences and JPY
• Graphs of independent variables
• Appendix A-1

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