How to Trade USD/JPY?

How to Trade USD/JPY?

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In this overview, we will discuss trading the USD/JPY currency pair. This pair reflects the correlation of the US dollar and the Japanese yen; it is one of the majors in Forex.

Now let us discuss the factors that influence the quotations of the pair and examples of trading it.

Some facts about the JPY

The yen is the national currency of Japan. It is the third popular currency after the USD and EUR. Its name is derived from a Japanese word meaning “round”. Its international code is JPY, its sign is ¥.

Before the yen was introduced as the national currency, Japan functioned by the “Tokugawa” monetary system. The first yen was issued in 1869 and officially established as the national currency in 1871. That very year, the government put on a halt the exchange of clan money that had been issued since the end of the 16th century.

The Japanese Central bank has the exclusive right to issue banknotes and coins. The denomination of banknotes is from 1,000 to 10,000 yen; on the obverse, there are portraits of Japanese significant cultural figures. The denomination of coins is from 1 to 500 yen.

What are the fundamental factors influencing the USD/JPY quotations?

Several fundamental factors influence the quotations on USD/JPY.

The dependence of the yen on the import of resources

Japan has very limited natural resources; hence, its economy depends strongly on the export/import correlation. When the price for commodities grows, the quotations of the yen shrink and the USD/JPY pair grows.

The intervention of the BoJ

The next peculiarity is periodical currency interventions. Japan is a large producer of various goods that mostly lives on export. If the yen is too expensive, this makes Japanese goods less competitive, so the Bank of Japan is usually not happy with the yen being too strong, and USD/JPY drops below 100 ye per dollar. In this case, the Central bank can carry out an intervention – it buys the dollar for the yen massively to increase the exchange rate of USD/JPY.

Low refinancing rate of the BoJ

The Japanese economy, since the mid-1990s, has been in deflation, which is the opposite of inflation, a gradual decrease in the prices of goods and services. This hurts the growth of the Japanese economy, hence the Bank of Japan and the government has been long trying to eliminate deflation by decreasing interest rates and pouring additional money into the economy.

As a result, the interest rate of the BoJ used to be near zero for a long time, and currently, the rate is even negative: - 0.1%. The low rate makes the yen appealing for sales against profitable currencies, such as the USD. If the quotations of the dollar grow, USD/JPY will do alike.

Also, there is a trading strategy based on making a profit on swaps/rollovers that appear out of the difference in the interest rates of currencies. It is called Carry Trading. I have described it in detail in the article about swaps in Forex:

Protective function in crises

Another important factor that influences the USD/JPY rate is the use of the yen as a safe-haven asset in various crises. When another crisis is in its active phase, stock markets fall, investors get rid of risky assets and buy protective currencies: the USD, the CHF, the JPY. In such times, the rate of USD/JPY can slump noticeably because the yen gets stronger.

Trading characteristics of USD/JPY

This pair belongs to majors, characterized by high liquidity. In terms of trading volume (about 15% of the total Forex volume), it is one of the leading pairs. It is roughly in the same position with GBP/USD, being inferior to EUR/USD only. The behavior of USD/JPY somewhat indicates the correlation between the Japanese and US economies.

If the US economy is all right, the world economy and stock markets are growing, USD/JPY also grows. And vice versa: if the US economy starts developing at a lower speed, and stock markets are in some sort of a crisis, USD/JPY will also be falling. Let us have a look at the main characteristics of this currency pair.

  • Active trading time: the pair trades 24h a day except for the weekend. It is most active in the American and Asian sessions. During these sessions, trade volumes are the largest, and main movements occur.
  • Volatility is not the strongest side of the pair. It is characterized by moderate daily volatility of 70-80 points. However, in crises or when stock markets are falling, the pair can make surges of over 200 points.
  • Spread is the advantage of the pair: it is minimal thanks to the high liquidity. On popular ECN accounts, it is normally within 1 point.

How to trade USD/JPY?

To my mind, there are three main trading options for USD/JPY:

1. Selling in crises or when stock markets are falling

Using the fact that the yen acts as a protective asset in force majeure situations, you can sell USD/JPY at the beginning of a new crisis. When stock markets are falling, USD/JPY will also be declining.

After the pandemic of the coronavirus started in 2020, the quotations of the pair fell from 112.0 to 102.0 yen per dollar. Also, in crises, the yen can grow even higher against such volatile currencies as the British pound (GBP).

USD/JPY and GBP/JPY declining in crises

2. Buying after crises or when stock markets grow

When the acute phase of a crisis ends, economies and stock markets normally start restoring, and investors leave protective assets for stocks. At such times, USD/JPY, if there are no negative events for the USD, is also prone to growth and becomes attractive for purchases.

Since the beginning of 2021, thanks to the optimism provoked by the appearance of anti-coronavirus vaccines, the world's economy has started livening up; stock markets are growing, and USD/JPY is also ascending. Later, if inflation starts growing in the USA, and the Fed lifts the interest rate, USD/JPY can form a long-term uptrend.

USD/JPY growth after crises

3. Trading by tech analysis

For trading USD/JPY, you can use not only classic tech analysis but also various original methods. Traders prefer strategies based on price patterns, candlestick patterns, Price Action. Thanks to the minimal spread, scalping strategies are also good here.

Add here trading by various indicators, either a complex one or a whole system of them. Signals from indicators can become a basis for automatic trading systems.

USD/JPY tech analysis

To put it simply, the pair works with almost any type of analysis, its chart is good for finding price patterns, also it suits strategies of various lengths, from intraday to long-term ones. If you are just forming your strategy and plan to add USD/JPY to your portfolio, try studying the following tech analysis methods:

Bottom line

USD/JPY is one of the most popular currency pairs in the market. Thanks to its liquidity, accessibility, and minimal spread, many traders like this pair. You can trade it both fundamentally or technically. First practice on a demo account, and then be disciplined about your risk-management rules.

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