HOW TO TRADE USD/JPY

Table of Contents
Trading USD/JPY: An Introduction ................................................................................................... 3

The History of the USD/JPY Exchange Rate ................................................................................... 3

How to Trade USD/JPY Using Fundamental Analysis ...................................................................... 5

How to Trade USD/JPY Using Technical Analysis............................................................................ 6

Psychology and Risk Management Foundations............................................................................. 7

Disclaimer .......................................................................................................................................... 9

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HOW TO TRADE USD/JPY

Trading USD/JPY: An Introduction

The USD/JPY exchange rate is one of the most liquid, and most frequently traded, currency pairs
in the world. The Japanese Yen and US Dollar are both commonly known as haven-associated, or
anti-risk, currencies.

In fact, the two currencies together account for 66% of the world’s official foreign exchange
reserves, according to data from the International Monetary Fund. This means that it can be
vitally important for traders stay on top of developments on both fronts.

Moreover, given USD/JPY’s use as a gauge of overall market sentiment, investors should endeavor
understand what the fundamental drivers of this highly influential exchange rate are, and the
most appropriate technical strategies to use when looking to take long or short positions.

The History of the USD/JPY Exchange Rate

The Japanese Yen is the third most frequently traded currency in the world and is commonly known
as an ‘anti-risk’ asset due to its stronger performance in times of increased market volatility and
uncertainty.

This outperformance comes on the back of several fundamental factors:

• Japanese investors have historically allocated more money internationally than

domestically, resulting in the nation’s net foreign assets outweighing its net foreign
liabilities. This leads to a surge in JPY when global market sentiment sours and ultimately
results in local investors liquidating their international positions, thereby repatriating their
funds back into Japanese Yen.

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Japan – Net Foreign Assets (1960-2019)

• The Bank of Japan’s dovish approach to monetary policy, that has seen the nation’s short-
term interest rate hover around 0%, and at points in slightly negative territory, since 2000.
Historically low rates make the Yen the prime candidate for carry trade strategies. This
approach involves borrowing a low-yielding currency in order to buy a higher yielding
alternative, in an attempt to profit from the interest rate differential.

Japan Interest Rate

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HOW TO TRADE USD/JPY

• The Japanese government’s response to the 1990 banking crisis, where a slew of new
policy measures and laws shored up the local banking system and gave authorities better
tools to deal with future bank failures.

How to Trade USD/JPY Using Fundamental Analysis

A range of underlying fundamental variables impact the risk-gauging USD/JPY exchange rate.
Traders ought to be aware of them and their possible impact on the currency pair.

• A pivotal role is often played by the United States Federal Reserve and the Bank of Japan’s
monetary policy settings as well as the prevailing trend in expectations for their future
path. Speculation about on-coming changes in traditional and unconventional monetary
policy measures can be explosively market-moving.

• Market-wide sentiment can also have a strong impact on the USD/JPY, with periods of
high volatility and uncertainty normally coinciding with JPY strengthening against USD to
lead the exchange rate lower. A notable spike higher in the CBOE Volatility Index (VIX) –
the market’s so-called “fear gauge” – usually coincides with a significant downturn in
USD/JPY.

USD/JPY Correlation Table (2000-2020)

Source: Bloomberg

• Economic data can have a strong influence on USD/JPY, with GDP, CPI, employment and
PMI economic data releases all potentially informing forecasts for an on-coming monetary
policy response from the Fed and/or the BOJ.

• USD/JPY rates also appear to have a relatively strong positive correlation to US 10-year
Treasury yields, which might be another reflection of the pair’s sensitivity to changes in
overall risk appetite. Generally, falling bond yields suggest that market participants are

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HOW TO TRADE USD/JPY

seeking ‘safe haven’ assets. It is perhaps not surprising then that USD/JPY and bond yields
tend to chart a similar course. Of course, correlation is not causation. Nevertheless, it is
probably wise to keep this relationship in mind.

USD/JPY daily chart created using TradingView

How to Trade USD/JPY Using Technical Analysis

Due to its popularity and high volume of market participation, USD/JPY is often a favoured currency
pair for technical traders. The pair has been known for its adherence to major psychological chart
barriers and for its tendency to move sharply away from major support and resistance levels.

USD/JPY rates also appear to frequently carve out Symmetrical Triangle consolidation patterns,
with breakouts normally resulting in the establishment of a primary trend.

The MACD indicator can be used to filter buy and sell signals when trading USD/JPY, with multiple
bearish crossovers - in December 2017 and June 2020 – and bullish crossovers – in January and
August of 2019 – appearing to signal a significant shift in trend.

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HOW TO TRADE USD/JPY

USD/JPY daily chart created using TradingView

Psychology and Risk Management Foundations

It is important for USD/JPY traders to be patient and disciplined before entering a trade. Before
even looking for a setup, a trader should know how much they are willing to risk and have a
reasonable expectation of what they are looking to gain on the position.

Here are some tips for trading USD/JPY:

• At DailyFX we often suggest limiting your exposure to less than 5% on all open trades.

• Before entering a trade, decide on a risk-reward ratio. Sometimes, a trade with seemingly
compelling fundamental and technical aspects is nevertheless unattractive because the
necessary risk outweighs a reasonable profit target estimate. In my experience,
overlooking this problem to the detriment of performance is a common pitfall for new and
even some seasoned traders.

• Entering a trade before major economic data releases is usually best to be avoided. Major
releases can cause aggressive spikes in volatility and it is almost always better to wait for
the markets to settle before trading again.

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HOW TO TRADE USD/JPY

• Record all of your trades so that you can review them after the position has been closed.
Doing this can help to pinpoint areas of the trading strategy where problematic elements
need to be fine-tuned.

• It is usually good practice not trade if you are emotional, tired or bored. It is almost always
best to have done the appropriate research and analysis to be confident in the trade.

• Paying attention to selecting the appropriate trading time frame that suits your goal can
be critical to a strategy’s success, despite being often overlooked .

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Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.
We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.
Forex trading involves risk. Losses can exceed deposits.
We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.

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HOW TO TRADE USD/JPY

Disclaimer
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High Risk Investment

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree
of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully
consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain
losses in excess of your initial investment. You should be aware of all the risks associated with foreign exchange trading,
and seek advice from an independent financial advisor if you have any doubts.

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