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The USD/JPY is the ticker for the US dollar to yen exchange rate in the Forex trading. This pair is popularly known as the Ninja, mainly because the famous heroic character originates from Japan. The USD-JPY belongs to the majors group in the Forex market, and is the second most liquid currency pair, behind only the EURUSD. In the USD/JPY pair, the US dollar is the base currency, while the Japanese yen is the quote currency. When, for instance the price of the USD/JPY is 110, it means that one would require 110 Japanese yen to acquire 1 US dollar. The USD/JPY pair has always been popular among forex traders, as it provides volatility throughout, and particularly during ‘weird’ Asian hours, thus effectively ensuring a 24-hour market.
History of the USD/JPY
While the US dollar is currently the primary world’s reserve currency, there was a time in the 1980s when the yen was making a serious claim for that position. Japan’s extended economic decline, however, ensured the yen never achieved its ‘dream’, but the currency is still very dominant in the world’s trade and is the fourth largest reserve-held currency. Japan has always been one of the world’s largest net exporters, with exports contributing 40% to its GDP. With such heavy reliance on exports, the Japanese government is famous for intervening in the currency markets so as to be able to control the prices of their products in international markets. Still, the Japanese yen has remained the most liquid currency in Asia and is often used as a form of proxy for the entire Asian economic growth.
Highs and Lows
Japanese government intervention in the markets has made the Ninja a pattern currency pair. Historically, the pair has remained contained within the 76-146 price range. In recent years, the range has been more between 85-130. But the pair posted its all-time highs of 306.84 in December 1985, and all-time lows of 75.74 in October 2011, during the global financial crisis.
Major Bodies Influencing the USD-JPY
The major body influencing the USD-JPY is the Bank of Japan (BoJ), notorious for numerous market interventions. The BoJ releases interest rates monthly, accompanying them with rate statements that will give traders and investors an idea of future policy direction. Japan’s Statistics Bureau also releases important data periodically that can have significant impact on the USD-JPY rate. As Japan’s economy is export driven, data such as Trade Balance, GDP and Current Account almost always spur much volatility on the USD to JPY. The US Federal Reserve will also impact the USD to yen pair, with major monetary policy decisions capable of forming long lasting trends on the pair. The US Fed releases interest rates eight times a year. Japan is an earthquake prone nation, and as such, the Japan Meteorological Agency is an important body that can influence USD-JPY prices. Severe earthquake warnings of the Earthquake Early Warning (EEW) system can pile pressure on the Japanese yen and consequently impact the USD/JPY rate.
The USD/JPY has always shown a great correlation with crude oil trading price. This is logical, as Japan is one of the most industrialized nations in the world, and one of the largest importers of the commodity. The Japanese yen usually falls when oil prices rise, and vice versa. Thus, USD/JPY is positively correlated with oil. The pair will usually rise when oil prices are rising and fall when oil prices are falling. While this correlation does exist, it is vital to analyze the markets effectively before trading the USD/JPY pair.
Why is the USD/JPY so important?
The USD/JPY is so popular that it is one of the most traded pairs in the currency markets. When taken in isolation the U.S. dollar is the most traded currency, and the Yen is the third most traded currency. The pairing between the two is an important marker of trade between Asian markets and the U.S., with Japan representing a significant export economy, particularly in the electronics and auto sectors. Historically this pairing was used for the carry trade, where traders held the pair just to collect the interest differential between the two currencies.
How do I trade the USD/JPY?
While it is possible to trade the USD/JPY pairing directly through the forex markets, it is also possible to trade it via contracts for difference (CFDs) and speculate on price changes in that way. The CFD is an agreement taken out between client and broker, where one party agrees to pay the other the difference in prices from the start to the end of the trade. One of the benefits of using a CFD to trade forex pairings is the ability to use greater leverage with the CFD.
When is the best time to trade the USD/JPY?
The USD/JPY is an interesting pair when we consider when the best time to trade is because of the huge time difference between New York and Tokyo. Those looking to day trade this pairing need to know when there’s the greatest liquidity in the market, otherwise the pair tends to just drift, without changing much in value. There’s no way to make profits from that type of subdued price action. History shows that the best window of opportunity for trading this pair is from 12:00 to 15:00 GMT. That’s when the pair sees the greatest liquidity and volatility.