In this review, we will look at the specifics of trading the USD / JPY currency pair. This pair represents the ratio of the US dollar rate to the Japanese yen rate and is one of the major Forex currency pairs popular with traders.
Let’s take a closer look at the factors affecting the price. USD / JPY, as well as examples of trading this currency pair.
A Few Facts About the Japanese Yen
The yen is the national currency of Japan. In terms of popularity in the foreign exchange market, it ranks third, after the US dollar and the euro. The Japanese currency got its name from the form “en”, which means “round” in Japanese. International code: JPY, the yen symbol is the ¥ sign.
Prior to the introduction of the yen as the single Japanese currency, the Tokugawa monetary system operated in the country. First minted in 1869, the yen was officially adopted as the base unit as a result of the monetary reform of 1871. In the same year, the government suspended the exchange of clan paper banknotes, which were issued by the feudal lords from the end of the 16th century.
The Central Bank of Japan (Bank of Japan) has the exclusive right to issue banknotes and coins. The banknotes are issued in denominations of 1,000 yen to 10,000 yen and feature prominent cultural figures in Japanese history on the obverse. Coin denominations range from 1 to 500 yen.
What are the fundamental factors affecting the USD / JPY quotes?
There are several fundamental factors that affect the quotes of the USD / JPY currency pair:
Yen’s dependence on resource imports
Japan’s natural resources are quite limited, so its economy is highly dependent on the export / import ratio. When commodity prices rise, it contributes to the depreciation of the yen, which strengthens the USD / JPY currency pair.
Bank of Japan intervention
The next feature of the pair is periodic currency interventions. Japan is a major producer of various goods, and the country’s main income comes from exports. The too expensive yen reduces the competitiveness of Japanese goods, so the Bank of Japan does not like it when the yen is strongly strengthening and the pair USD / JPY falls below 100 yen per dollar. In this case, the Central Bank may intervene – a large-scale purchase of dollars for the yen, in order to increase the rate of the USD / JPY pair.
Low refinancing rate of the Bank of Japan
Since the mid-1990s, the Japanese economy has been characterized by a state of “deflation” – a phenomenon opposite to inflation, when there is a decline in the general level of prices for goods and services. This negatively affects the growth rate of the economy, so the Bank of Japan and the country’s government have been trying for many years to eliminate deflation by lowering interest rates and through quantitative easing – injecting additional money into the economy.
As a result of this policy, the interest rate of the Bank of Japan has been close to zero for a long time, and at the moment the rate is even negative: – 0.1%. The low interest rate makes the yen attractive to sell against high yielding currencies, including the US dollar. With the growth of rates in the US, the USD / JPY pair will strengthen.
There is a trading strategy based on making a profit on swaps / rollovers due to the difference in interest rates across currencies, it is called “Carry Trade”. I talked about it in more detail in the article about swaps on Forex:
Protective function of the yen during crises
Another important factor affecting the USD / JPY rate is the use of the Japanese yen as a protective currency during various crises. During the active phase of the next crisis, stock markets are falling, investors are actively getting rid of risky assets and buying protective currencies: the US dollar, Swiss franc, yen. At this time, the rate of the USD / JPY pair may seriously decline due to the strengthening of the yen.
Trading characteristics of the USD / JPY pair
The USD / JPY pair belongs to the major currency pairs (majors) and is characterized by high liquidity. In terms of trading volume on Forex (about 15% of the total volume), it is one of the leading, occupying approximately one position with the GBP / USD pair and second only to EUR / USD. The behavior of the USD / JPY pair is a kind of indicator showing the comparative state of the US and Japanese economies.
If the US economy is doing well, the world economy and stock markets are growing, the USD / JPY pair is also strengthening. And vice versa, if growth rates decrease in the USA, there are crisis phenomena and stock markets fall – the USD / JPY rate will decline. Let’s consider the main trading characteristics of this currency pair:
- Active trading hours – the pair is traded around the clock except weekends, the most active during the Asian and American trading sessions. It is at this time that large trading volumes take place and the main movements in USD / JPY take place.
- Volatility is not the strongest side of the USD / JPY pair, it is characterized by moderate average daily volatility within 70-80 points. But during crises and against the background of falling stock markets, the pair is capable of making strong movements of 200 or more points per day.
- The spread is the advantage of this pair, since the spread on USD / JPY is minimal due to the high liquidity. On popular ECN accounts, the spread is usually less than 1 pip.
How to trade the USD / JPY currency pair?
In my opinion, there are three main ways to trade USD / JPY:
1. Selling during the crisis on the wave of falling stock markets
Using the properties of the Japanese yen to act as a protective currency during various force majeure events, one can sell the USD / JPY pair at the beginning of the next crisis. In the wake of falling stock markets, the USD / JPY pair will also decline.
After the outbreak of the coronavirus pandemic in 2020, the pair fell from 112.00 to 102.00 yen per dollar. Even stronger during the crisis may be the growth of the yen against such volatile currencies as the British pound (GBP).
2. Buying after the crisis on the wave of rising stock markets
After the end of the acute phase of the crisis, as a rule, the economic recovery and the growth of stock markets begin, and investors leave the defensive assets and start buying shares again. At this time, the USD / JPY pair, in the absence of an obvious negative on the US dollar, is also prone to growth and becomes attractive for buying.
Since the beginning of 2021, on the wave of optimism associated with the emergence of vaccines against coronavirus, the global economy began to revive, stock markets are growing and the USD / JPY pair is also showing an upward trend. In the future, if inflation starts to rise in the US and the Fed’s interest rate rises, a long-term uptrend may form for the USD / JPY pair.
3. Trading by technical analysis
To trade the USDJPY pair, you can use not only classical technical analysis, but also various author’s methods. Trading strategies based on price patterns, candlestick patterns, and Price Action patterns are popular among traders. Due to the minimum spread for the USD / JPY pair, various scalping trading strategies are suitable.
Here you can also add trading based on signals from various indicators. It can be either one complex indicator or a whole trading system of several combined indicators. Indicator signals can serve as a basis for creating automated trading systems.
Simply put, the pair lends itself to almost any kind of analysis, its chart can be safely used to find price figures and patterns, and it is also suitable for strategies of different duration – from intraday to long-term. If you are just starting to form your trading strategy and plan to add USDJPY to your currency portfolio, we recommend that you study the following technical analysis techniques in more detail:
USD / JPY is one of the most popular currency pairs to trade in the Forex market. Due to its liquidity, availability and minimal spread, the pair is popular with traders. You can trade a pair both on the basis of fundamental factors and using technical analysis. To begin with, you need to hone your trading skills on a demo account, and in the future, discipline to follow the rules of risk management.