How To Trade USD/JPY
The USDJPY pair is among the most traded currency pairs in the binary options market. The currency pair combines the currencies of two very economically powerful nations in the world. This makes this currency pair very dynamic and it also correlates with the equity markets.
Trading A Currency Pair – USDJPY
The correlation of the USDJPY with the equity markets simply imply that whatever is taking place in the equity markets around the world is directly affecting the USDJPY and whatever is happening to the USDJPY is also affecting the equity markets.
This shows that the trader should be very much concerned with the monetary policies as well as the economic data which causes the equity markets to move than he or she should be concerned with the economic releases from Japan. Bu this does not mean that the trader should completely ignore the economic releases from Japan; they are also important analytical tools when trading this currency pair. For example, lately, the USDJPY saw a huge upward trend as a result of the Bank of Japan doing a major quantitative easing program. Therefore, it can be clearly observed that the USDJPY is a victim of assets inflation in the equity markets.
The following are some of the things that one should be concerned with when it comes to the USDJPY:
- The US and Japan equity markets. This mainly has to do with the monetary policies in US and Japan. A good example is the one that we just looked at above, after the quantitative easing program of the Central Bank of Japan which saw the USDJPY exchange rates rise drastically.
- The interest rate decisions of the Central Banks of both Japan and US. The Bank of Japan meets on a monthly basis while the Fed meets after every six weeks and there ara usually some minutes released in the US in between the six weeks.
- The Tankan report which shows the overall condition of the economy of Japan
Important Economic Releases To Watch In Japan
Of late, traders should carefully watch what the Bank of Japan is doing with the Japanese bond buying program without neglecting what it also says about the program. This has s great influence on the Japanese economy and thus directly affect the USDJPY currency pair.
Looking at the bond-buying program (quantitative easing program) in Japan, it is the largest of its kind in the world. The program is very aggressive. Actually, if compared with other such programs, it is several times bigger. For example, if we compare it to the one in the United States of America, it (Japanese bond buying program) is almost three times bigger. And this great bond buying program in Japan is being applied to an economy that is twice as small as that of the US.
This makes the economy of Japan to be more influenced by the monetary policies that the Bank of Japan is making and thus making every meeting, speech as well as press conference that the bank makes to be something that every trader in the world should carefully scrutinize in a bid to understand the currency pair possible movements.
The common economic releases such as CPI, which is the Consumer Price Index, GDP, which is the Gross Domestic Product, the Tankan report as well as other releases to be of great importance. However, these are secondary to the correlation between the USDJPY and the world equity markets.
Also, the relationship between the decisions of the Central Banks and the interest rates still exists. For example, higher inflation leads to higher interest rates, while lower inflation leads to lower interest rates. Therefore, every time the CPI release is just about to be done, traders should expect some volatility in the market.
Important Economic Releases To Watch In United States
Since the US is the largest economy in the world, there are very important economic news releases that occur every month.
The most important economic releases are the Non–Farm Payrolls and the CPI. However, there are other releases which should also not be overlooked; these include the ISM (Institute for Supply Management), PPI (Producer Price Index), Retail Sales (released on a monthly basis), ADP (private payrolls), GDP (release on a quarterly basis) and the Durable Goods Orders among several other releases.
What To Expect From Economic Releases
Most interestingly, the economic releases mean too little for the USDJPY since these releases mainly occur during the Asian Trading Session which is known to have very low liquidity as well as volatility. Nevertheless, if the releases are different from the actual releases, then there is likely to be a very sharp move in the market since there is already a conducive environment created by the low liquidity.
Above all, traders should look at the correlation that exists between the USDJPY and the US markets. This means that the traders should look at the direction when cash and futures in the US are opening so as to have a correct guess of the direction of the movement of the USDJPY currency pair.
When it comes to the economic news releases, the ones from the US should be considered first and then those from Japan should be secondary.
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References and Further Reading:
- Scaling and memory in volatility return intervals in financial markets (Kazuko Yamasaki, Lev Muchni, Shlomo Havlin, Armin Bunde, and H. Eugene Stanley)
- TOWARD A REGIONAL EXCHANGE RATE REGIME IN EAST ASIA (Masahiro Kawai)
- Indian Currency Regime and Its Consequences (Ila Patnaik)
- Alternative volatility models for risk management and trading: Application to the EUR/USD and USD/JPY rates (Christian L DunisYao Xian Chen)
- Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set (MENZIE D. CHINN, MICHAEL J. MOORE)