How to Trade the USD/JPY Currency Pair Amid the Turmoil
Insights into Trading the USD/JPY Currency Pair
The USD/JPY currency pair is trading at 100.6930, up 0.20% or 0.2070. For the year-to-date, the yen has strengthened significantly against a basket of other currencies. This is especially true against the greenback where it has gained 16.30%. The 5-day performance of the USD/JPY pair reflects a decline of 1.82%. The 52-week high for the pair is 125.2720 and the 52-week low is 99.9730. For the week ending Friday, 8 July currency traders were focused on one of the most important economic indicators coming out of the US – nonfarm payrolls. That nonfarm payrolls for June bested expectations with 287,000 jobs was completely unexpected. The consensus forecast among analysts was that the US would add 175,000 new jobs in June.
Why US Nonfarm Payrolls Matter with Currency Pairs?
The performance of the US economy in terms of non-farm payrolls was so significant that it was the best reading in 8 months. Recall that in May 2016, the US added just 11,000 new jobs in the nonfarm payrolls sector. For the year-to-date, there has only been one month of month-on-month increases other than the jump from May to June. That took place between January and February 2016 when nonfarm payroll employment increased by 65,000 new jobs from 168,000 jobs in January to 233,000 jobs in February. Since then, there have been declining monthly performances, although year-on-year the US economy has remained strong. Analysts continually look to the US nonfarm payroll jobs report to determine which direction the economy is moving. Now that the US Labor Department has reported such a strong performance, this will bode well for the Fed.
Recall that Fed chair, Janet Yellen has been alluding to the need for a much improved US economic situation prior to embarking upon interest-rate hikes. At this juncture, the prevailing interest rate in the US is 0.25% – 0.50%, and Yellen is expected to increase that by 25-basis points later in the year. If we look at the USD/JPY currency pair from a technical perspective, we see a lot of back-and-forth taking place. Traders are naturally anxious now that the pair has moved closer towards 100:1, as this was a significant support level that the yen might break through. Central bank policies in Japan remain dovish, with various forms of quantitative easing taking place. There have been calls for the Bank of Japan to intervene in currency markets if the yen reaches 100:1 against the greenback. Such measures could take the form of mass purchases of foreign currency, quantitative easing to weaken the Japanese yen, or further interest-rate cuts. The pair is presently volatile, and it is being buoyed by all the uncertainty surrounded by a Brexit.
The GBP Falters and Aids the JPY
The sterling has hit a 31-year low against the greenback, after it plunged beneath the key 1.30 level to as low as 1.2800 before stabilizing in the 1.29 range. This naturally aids the Japanese yen which is regarded as a safe-haven currency. However, a strong Japanese yen is not necessarily good for the Japanese economy. Exports are hurt by a strong yen since Japanese goods cost more on international markets. From an import perspective, Japanese households enjoy greater purchasing power with the currency as strong as it is. The interrelatedness of equities markets, commodity markets and currency markets is easily seen when you look at how the geopolitical turmoil from a Brexit is impacting on the yen. Traders are shorting the GBP and going long on the JPY. The USD is a preferred currency, but it does not have safe-haven status like the JPY does.
Tip: The thing to look out for when trading this pair is if the USD/JPY pair breaks through the 100:1 support level. If this happens, it could trigger a response from the Bank of Japan.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.