The usd jpy currency pair is another of the most widely traded pairs in the forex market, and currently accounts for approximately 20% of all currency trades each day. However, that said, the usd jpy pair can be extremely volatile, is often very unpredictable, and can trade in ranges for long periods of time, adding to the frustration from a speculative trading perspective. The reason for this is largely due to the fact that both the US dollar and the Japanese yen are considered to be safe haven currencies, and as a result, when markets and investors are nervous, a battle ensues between these two currencies, with the two giants struggling for supremacy on the forex chart. In addition the Bank of Japan is one of the most interventionist of all the central banks, and has no qualms in intervening should the Japanese currency strengthen against the US dollar, as this could affect exports and the overall Japanese economy as a result.
Traditionally the usd jpy has been the market determinant of risk, when markets have an appetite for risk, then bond yields will tend to rise as interest rates fall. In addition, trading the usd jpy is further complicated by the fact that interest rates in Japan have been historically low for many years, following Japan’s economic turmoil in the 1990′s, and since then their interest rates have been 0% or marginally above, thereby making the Japanese yen the low yield currency of choice for forex speculators, borrowing the yen to fund purchases of higher yielding and safer asset classes.
The US economy of course remains the largest in the world, whilst the currency itself has been replaced by the euro as the currency of first reserve in Europe, although the US dollar remains the principle currency for international transactions and for major commodities such as oil. In the last two years, the euro has lost much of its recent appeal with several EU countries now threatening to default on their sovereign debt, and as such, some economists are starting to suggest that we could see the euro replaced as a result.
Economically the United States is the worlds largest net importer of goods and the third laregest exporter, and such dictates the world balance between recession and growth. The sub prime crisis is a classic example of how the US economy drives world demand and economic stability, and whilst some will argue that some of the emerging economies such as China and India will eventually overtake the US in terms of world importance, until then the US economy remains dominant. The American economy is often referred to as ‘mixed’, a term used to describe the importance of both private enterprise and government controls working together, to achieve a successful economy. Americans believe supply and demand determines the prices in the market, and this is underpinned by their belief in free enterprise and the entrepreneurial spirit.
Japan’s success on the other hand is often considered to be an economic miracle, rising from the ashes of World War 2 to become the fifth largest exporter in the world and fourth largest economy, and seen as leading the world in technologically advanced, and innovative products, whilst its reputation for quality and reliability are legendary. The reasons for this success are many and varied, but primarily has been based on a close relationship between industry and government, with joint goals, a natural work ethic, and coupled with a very small GDP spend on defence. The economic expansion continued dramatically throughout the 1970′s and 1980′s before suffering a collapse in the 1990′s as the housing bubble burst, a mirror image of the housing collapse in the US which triggered the worldwide recession of the last few years. What is interesting to note is that it Japan took 10 years to recover from the economic crisis and that clearly the lessons of the past have not been learned, and no doubt at some point in the future history will repeat itself.
The Federal Reserve is responsible for setting monetary policy in the US, having been established in 1913 with complete independence both from central Government and also the US President. The Federal Open Market Committee ( FOMC) meets eight times a year to set interest rates along with delivering economic forecasts for key fundamental releases such as GDP, inflation and unemployment rates. Indeed these statements and forecasts are often more interesting than the rate decisison itself, particularly in the last few years where interest rates have been at historic lows, and held at such a level that the US dollar has joined the Japanese yen as the low yield currency of choice for currency speculators.
One of the most interesting indicators for the US dollar is the dollar index, which measures the performance of the usd against a basket of other currencies, and as such provides a technical view of the strength or weakness of the currency against all the other majors.
Forex trading indicators
- Interest rates are managed and set by the FOMC, which generally releases the data following a two day meeting, normally starting on a Tuesday and ending on the Wednesday afternoon with the announcement.
- Non farm payroll, is the big unemployment number which is released monthly by the US Bureau of Labor Statistics, and is the one that all forex traders await each month, as volatility can be extreme during the release and afterwards for several hours. The release details the jobs created during the month along with changes in pay and rates of pay, giving a detailed view of the economy and workforce as a result. This key piece of fundamental news is always released on the first Friday of each month, and an advance economic indicator two days beforehand is the ADP, which can provide an excellent guide to the NFP number two days later.
There are many other news economic announcements that move the usd jpy forex pair, including consumer confidence, PPI ( producer price index) and the Beige Book – you will need to follow all these announcements if you are to be successful in your forex trading, and all of the above indicators, along with many others, are covered in detail in the economic indicators section of the site.
