Home Forex Markets Learning from History: The Complete Guide to USD/JPY Trading

Learning from History: The Complete Guide to USD/JPY Trading

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Learning from History: The Complete Guide to USD/JPY Trading

What is USD/JPY?

USD/JPY is one of the most popular currency pairs among traders. According to the Bank for International Settlements (BIS), USD/JPY is the second most traded currency pair in the world (the bank works with the world’s central banks to compile statistics that inform analysis of global liquidity, among other things). Looking at the 2019 trading volume through the IG platform, you will find that USD/JPY accounted for 13.2% of FX traders activity.

Please note that there is a risk of loss when trading currency pairs. All traders should carefully consider these risks.

It is worth noting that the Bank for International Settlements has good resources to measure the size of the $6.6 trillion global interbank market, but non-institutional traders/retail/individual investors are not directly involved in transactions in the interbank market. Instead, retail investors trade with registered foreign exchange dealers who act as counterparties to all their clients’ transactions.

Data from the Bank for International Settlements 2019

Why trade USD/JPY?

Representing the two largest economies in the world, USD/JPY is a popular macro trading market – especially as a hedging tool for manufacturers and global importers/exporters. As the yen is the most traded currency in Asia, USD/JPY is often seen as an important link between the East and the West. The pair consists of two risk-averse currencies that tend to lag other G10 currencies in volatility, which helps amplify currency differences between major economies such as the UK and the US or Europe and the US. Therefore, traders will generally expect low levels of volatility in the pair, which will provide for a range or mean reversion, while trends or breakouts may be more common in other major pairs.

USD/JPY Technical Analysis Tips

With such a high volume in the market, USD/JPY tends to be the forex pair favored by technical traders. Psychological levels tend to play an important role, and prices have the potential to generate sharp inflection points from key support and resistance levels, characteristics that tend to make the pair more suitable for reversal/breakout trading methods and shorter intraday trend trades.

USD/JPY weekly chart

Learning from History: The Complete Guide to USD/JPY Trading

Source: Tradingview

The monthly chart above shows that some important psychological levels provide important pivots for prices – most notably the 105 area, which has supported prices since the 2018 lows.

USD/JPY Fundamental Analysis Tips

The 2007 financial crisis saw the dawn of a new era of central bank stimulus. The Fed has since embarked on its first round of quantitative easing, the unprecedented stimulus that played a major role in the worst recession since the Great Depression.

In Japan, decades of low growth and low inflation (and even deflation in some years) have created the conditions for a shift in policy approach. When former Japanese Prime Minister Shinzo Abe came to power in 2012, he proposed to revive Japan’s growth by using the Fed’s quantitative easing approach, combined with major changes in government policy and tax structure. This has allowed USD/JPY to gain more than 60% in less than three years.

USD/JPY monthly chart

Learning from History: The Complete Guide to USD/JPY Trading

Source: Tradingview

In the summer of 2015, the Chinese stock market crashed and sparked a severe bout of risk aversion, which led to the flow of funds to the yen. USD/JPY has been operating in a converging range for five years since then.

Therefore, the biggest focus at the time was whether the central bank would adopt more unprecedented easing. The Fed and the Bank of Japan are the longest-lasting central banks, and their competing policy stances continue to demarcate the price range. USD/JPY typically has a strong correlation with U.S. Treasury yields, making it quite sensitive to shifts in interest rates and rate expectations over longer time frames. It’s also worth noting that the yen, as well as the dollar, have the status of safe-haven currencies during times of economic uncertainty.

most active trading hours

As one of the most traded currency pairs, USD/JPY maintains a very high liquidity within 24 hours of the trading day, so you need to pay special attention to the trading during the Asian session, which is about from 6:00 GMT+8 time until 15:00 European opening. Also note that intraday volatility spikes during these high-risk events, as the pair is sensitive to economic data from the US and Japan, as well as central bank policy decisions, thanks to the FOMC and BOJ’s “heavy punch”.

The main participants

USD/JPY is very popular among large institutional traders, banks and multinational corporations. This currency pair is often used to hedge currency risk by manufacturers as well as exporters and importers worldwide. USD/JPY is often traded based on dollar flows and risk trends, which are determined by future interest rate expectations and risk appetite in the broader financial markets. The range-trading nature and sensitivity to event risk make USD/JPY an attractive asset for both retail and technical investors of all kinds.

Advanced Tips

The USD/JPY trading trend is developing rapidly, and the pair has been a popular trading product for short-term and short-term traders for the past five years. The pair is known for sharp reversals and quick breakouts, making it ideal for short-term scalpers and event risk traders looking to take advantage of sharp increases in volatility during key data or macro event releases. In practice, this may mean that targets and stops are set closer to the current price. Finally, it is worth noting the psychological price level, where the pair tends to make a sharp inflection move at important psychological levels.

(by Michael Boutros)

The content on this page is for general market commentary only and may not constitute investment advice of any kind (tax, legal, accounting). This article does not constitute an invitation or recommendation for direct investment in specific financial products. The content is for reference only. Readers should not rely on the information in this document, nor should its actions and omissions be relied upon. We are not responsible for the results of any person’s actions or omissions based on this article. We make no warranties as to the accuracy of the content provided or the adequacy of the information. This article is not intended for distribution within the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan for this purpose), except as permitted by the applicable laws of the People’s Republic of China.

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