A Complete Insight to USD/JPY Trading
From the global perspective, USD/JPY is the second-largest trading pair in the market. Our previous article discussed the possible factors that affect the exchange rate in the FX market. Today, we would like to dig into the USD/JPY pair from fundamental and technical perspectives in this article.
A Complete Insight to USD/JPY Trading
Japan is among the world’s largest economies and its currency, the yen, is the third most used currency behind the euro and the US dollar. The country is known for its automobile and electronics industry, and the economy heavily relies on its exports. Its blue-chip companies like Toyota, Suzuki, Nissan, Sony, and Panasonic are all listed on the Tokyo stock exchange and the international exchanges. The Japanese yen (JPY) has an inverse relation with the Japanese Stock Market (Nikkei 225), meaning when the country’s stock market performs well, the yen tends to move lower. The yen serves as a safe-haven status when there is instability in Asia or even when the country’s stock market performs poorly. As a result, the yen is the most traded currency globally, along with the USD/JPY currency pair.
The countries around the world adjust the interest rates to pursue their monetary policies. Japan, being an export-oriented economy, has followed a zero interest rate policy for nearly two decades. In fact, the Bank of Japan (BOJ) adopted a negative rate policy in 2016 to weaken the yen and support its export-heavy economy. Although, it is a debatable issue whether the Japanese economy has benefited from the zero interest rates. The other countries, especially the US, have often accused Japan of manipulating its currency. However, Japan maintains that lowering the interest rates is essential for combating deflation and is not for manipulating the exchange rates.
This is a tug of war between the rich countries in the world that causes the exchange rates to fluctuate and the stock markets to rise and fall. Japan believes the exchange rate between 110- 115 against the US dollar is ideal for exports and keeping the deflation in control. So, the BOJ does what it can to maintain the exchange rate in its favor. However, the US being the largest economy and the US dollar as the world’s dominant currency plays a central role in adjusting the yen’s value or any other currency in the world.
Because the US and Japan are the world’s two largest economies, and they are also the biggest trading partners, the USD/JPY pair has a major significance. In this article, we will look at the last 5 years’ performance of USD/JPY and investigate what moved the price especially after Donald Trump became the US president.
USD/JPY: A 60 Months Look Back
In 2015, the US was fast recovering from the 2009 recession and the Fed had been gradually raising the interest rates. In the same year, the USD/JPY largely traded near the 120 mark, except for a brief move towards 125 in the middle of the year. The Japanese economy was largely benefiting from a weak yen. However, as the year of US elections (2016) began the USD/JPY once again started to drop and made a low of 98.78. In response to the rising value of the yen, the Bank of Japan announced a negative rate policy that helped the USD/JPY to once again move back towards 118.00. The bullish momentum continued until the unexpected victory of Donald Trump.
Former President Trump, who was more focused on reducing the US trade deficit started imposing high tariffs on imports from China, Japan, and the European Union. In January 2017, right after taking the presidential oath, Trump withdrew from the Trans-Pacific Partnership agreement (TPP). The TPP was an agreement signed between 12 countries to reduce the trade tariffs and resolve investor-state disputes. This was the start of a new trade war, mostly between the developed countries. The USD/JPY also took the hit and dropped to almost 107 in September 2017. However, towards the end of the year, the USD/JPY managed to make some recovery and ended the year at 112.44.
In 2018, as Trump got more aggressive with trade tariffs, the USD/JPY continued moving in an almost similar pattern to the last year. The pair started with a drop towards 104.00 in the first three months and then gradually recovered to 114.00 towards the end of the year.
Transitioning from 2018 to 2019, the US economic numbers further improved year on year. The unemployment rate came down and the GDP number was promising. This also led the US Federal Reserve to raise interest rates. However, the USD/JPY could not move any higher than 112.22 in 2019 and ended the year on the lower side at 108.35.
The year 2020 started with the biggest crisis of the Coronavirus pandemic. The virus that was first found in China in December 2019 quickly spread around the globe. The pandemic caused global lockdowns, disrupted international trade, and suspended air travel. This led to one of the biggest international economic crises. The global economy started to shrink and a new era of stimulus plans and low-interest rates started. The Bank of Japan continued with its aggressive bond-buying program to this day. The Trump administration proposed the biggest stimulus plan of 1.9 trillion dollars and the Fed once again started to lower the interest rates. As the US dollar became weaker, the yen went stronger. The USD/JPY continued to drop almost the entire year and ended lower at 103.25. Meanwhile, Trump lost the 2020 US elections and Joe Biden became the new president.
Leading into 2021, Joe Biden’s economic policies seem more focused on domestic issues such as raising the minimum wage and improving the health infrastructure. In Biden’s presidency, the previously proposed 1.9 Trillion dollars relief plan was signed into the act in March 2021. With the Coronavirus vaccine roll-out, the majority of economic activities have resumed. In the first quarter of 2021, the USD/JPY rose from 102.00 to 110.00. After consolidating for a few months, the pair has gained nearly 300 pips in October and is trading at 114.20 at the time of writing. We could infer that the upwards traction in October was largely attributed to the positive US economic data and Fed’s indication on tapering the monthly asset purchase sooner than expected.
Technical Aspect of USD/JPY and Its Near Term Outlook
Having discussed all the fundamentals above, it’s worth mentioning here that technical analysis holds equal importance. It especially plays a significant role in the time of economic stability when economic numbers do not heavily impact the market. The technical tools and indicators help to identify the market direction. Even the visual analysis of a chart can indicate the support and resistance levels that play a key role in the trading. Above all combining the fundamental and technical analysis further raises the odds in the favor of a trader. Sometimes, an economic release that indicates a bullish momentum can be double-checked by analyzing the higher highs or by using a momentum oscillator.
The current technical outlook of the USD/JPY is strongly bullish. It has gained nearly 300 pips during this month and it appears to be heading towards the December 2016 high of 118.61. However, with this amount of gains in a single month a correction is also on the table. On the technical side, one reason for the correction can be the RSI that is deep in the overbought zone. Therefore, a long entry should be taken only on a correction. Based on the Fibonacci the correction can be between 112.60 and 113.20.
Considering the RSI’s overbought signal, a selling strategy on a daily time frame can also be used. The idea is to open a short position and exit on small profits. The strategy can be used as long as the RSI remains in the overbought zone. However, once the USD/JPY breaks above the current price level it would be an indication of a further rise. In such a case it will be a wise decision to refrain from placing short positions.
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