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Is the WRONG question. Why is the Yen so weak is the right one

Why is the Euro so weak? The Russian invasion of Ukraine, and the associated squeeze on gas supplies to Europe is the most common reason given. It is true that the implication is that Europe needs to spend more on defence, and has uncompetitive energy costs now. You have also seen a deterioration in the trade balance.

The problem I have with that analysis, is that it is not playing out in cross rates. If energy supply was the big driver, then I would expect the Euro to be collapsing against both the Norwegian Krone or the Great British Pound as their North Sea supply of energy become more strategically important. In both cases the Euro has weakened slightly, but remains much strong than pre GFC days.

Another argument that you could make is that the Eurozone (and Japan for that matter) have seen their trade balances deteriorate meaningfully. I do like this argument, but again its not particularly consistent. Australia has seen its trade balance improve meaningfully, and not seen its currency improve.

Sometime you hear people explaining Euro weakness is due to its unwieldy political structure, and its eventual political implosion (very popular argument of the political right). Again the problem with this argument is that the Euro has been very strong over the last 20 years versus both pound sterling and Norwegian krone. It should also imply Euro weakness against Japan, a single unified nation with none of the political problems of Europe. But when we look at EUR/JPY cross rate, the Euro has strengthened considerably against the Yen this year - or probably more correctly, the Yen has been very weak indeed.

This leads me to ask the question , could Yen weakness be driving Euro weakness?

The full video is for paid subscribers

Capital Flows and Asset Markets
Russell Clark